Taxation 1
raised from taxation will be used for the support of the
June 18, 2013
Taxation has been defined as the power of the
sovereign to impose burdens or charges upon persons,
properties or property rights for the use and support of
the government for it to be able to discharge.
Taxation is also the power to create revenue to defray
necessary governmental expenses.
Attributes of Taxation
1. I t is an inherent power of the sovereign it
exists and independent from the Constitution; it
exist independent from any act of legislation. In
other words, taxation exists when there is
government or of a state. Taxation as a power
emanates from the people.
2. It is legislative in character- because this power
is given to the legislature or the law-making
body. WHY? Because from the very beginning,
taxation is a power of the sovereign ad who is
the sovereign? The people. And when the
people exercise this power it is done through
their representatives and who are the
representatives of the people? You have the
legislature.
3. It is subject to Inherent and Constitutional
Limitations- Since the power of taxation is so
comprehensive and unlimited The power to
tax involves the power to destroy-this power is
so comprehensive in scope therefore, it should
be subjected to limitations. These limitations
are divided into two: Inherent Limitations and
Constitutional Limitations.
Then taxation the power to impose burdens or charges
upon persons, properties, or property rights for the use
and support of the government to support and to
enable the government to discharge its functions. This
tells us the purpose of taxation. The purpose of taxation
is that these charges and burdens that will be imposed
upon the subjects of the tax so the money that will be
government. Therefore, REVENUE is the PRINICIPAL
OBJECTIVE OF TAXATION.
There are three inherent powers of the State:
1. Police Power
2. Eminent Domain
3. Power to Tax.
SOURCES OF REVENUE OF THE GOVERNMENT- Charges,
taxes and fees.
Theory of Taxation: Taxes proceed from the theory
of the existence of the government is a necessity. This
is the principle which states that TAXES ARE THE
LIFEBLOOD OF THE GOVERNMENT. That the existence
of the government is a necessity because the
government will not be able to discharge its functions
without taxes (NECESSITY THEORY.)
The other basis would be the PROTECTION-BENEFIT
PRINCIPLE (Basis of taxation) - The reciprocal obligation
or the symbiotic obligation between the State and the
citizens. The obligation of the State is to extend
protection to the citizens and on the other hand the
obligation of the citizens is to support the government
by paying their taxes.
Under this principle, if a citizen pays more taxes, is
there an obligation on the part of the State to afford
more protection to the said citizen? No. Whether you
pay more or less the government shall give similar
protection and benefits among its citizens. This is based
on the other principle of taxation which is the ABILITY
TO PAY.
Aspects or Phases of Taxation:
1. Levying or the assessment stage- It is the
exercise of the power of taxation through its
legislative body. The Congress does not
implement the tax law.
 2. Collection and payment of taxes-TAX
ADMINISTRATION- Executive in character. The
executive shall implement the tax laws.
What is the extent of the Power of the Law-making
body with regards to taxation?
1. Determination of what would be the subject of
tax.
2. Determination of the purpose for the said tax so
long as it is for public purpose.
3. Determination of the tax amount or rate.
4. Determination of the manner, the means
agencies of the collection of tax.
Can one go to the Court and question the motive of the
legislature on the levy?
In one case, a certain person filed before the
RTC of Manila questioning on the imposition of tax
under the NIRC on the jewellery industry. Because
according to him the jewellers from Thailand, Vietnam
and other Asian countries are taxed less how come they
are taxed with a higher rate. Going back to the
question, can one go to the Court and question the
motive of the legislature on the levy? The answer is NO!
Because the wisdom upon determining the subject of
tax is upon the legislature for as long as it is for public
purpose.
However, if the question involves the inherent or
constitutional limitations of the tax law then you go to
the Court.
Power to Tax involves the Power to Destroy-This
principle came out because of the extent of the power
of the State which is very comprehensive and unlimited
BUT the said principle was debunked when another
principle came out- Power to tax is not the Power to
Destroy while the Supreme Court sits.
Non-Revenue Objectives of Taxation:
1. Taxation can be used as a device for Regulation-
Taxation may go hand with hand with the police
power. Police power could be used to exercise
the power of taxation.
****Lutz vs Araneta- It involves the imposition of CA
567 or the Sugar Adjustment Act. It was questioned
how come such act was only imposed upon the sugar
industry when the purpose of taxation is public
purpose. According the SC, the Sugar Adjustment Act ,
the tax which will be collected is a tax levied with a
regulatory purpose, to provide means for the
rehabilitation and stabilization of the threatened sugar
industry. In other words, the act is primarily an exercise
of the police power. The protection and promotion of
the sugar industry is a matter of public concern, it
follows that the Legislature may determine within
reasonable bounds what is necessary for its protection
and expedient for its promotion. Here, the legislative
discretion must be allowed fully play, subject only to
the test of reasonableness; and it is not contended that
the means provided in section 6 of the law (above
quoted) bear no relation to the objective pursued or are
oppressive in character. If objective and methods are
alike constitutionally valid, no reason is seen why the
state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made the
implement of the state's police power. So CA 567 is a
tax measure in aid and in support for the Sugar
Industry. So if a tax law is addressed only for the
benefit of a particular industry it does not mean that it
will violate public purpose because tax power may go
hand with hand with police power.
****Tio vs ERB- This is prior to the Optical Media Board,
the video industry was taxed under PD 1987 or An Act
Creating the Videogram Regulatory Board" with broad
powers to regulate and supervise the videogram
industry. So it was asked in that case whether taxing the
video industry was a tax or a regulatory measure. The
SC said that taxing the video industry is both a tax and a
regulatory and revenue measure. Likewise, the
imposition is also for public purpose. The taxation the
video industry is to regulate and rationalize the
uncontrolled distribution of videograms. PD 1987 is not
only a regulatory measure but also a revenue measure
prompted to realize earnings from videograms
establishment around 600 million per annum which was
not subject to tax which deprived the government of
additional sources of revenue. It is an end-users tax
imposed on retailers for every videogram they make
available for public viewing. It was imposed due to
rampant piracy, violations of IPs and proliferation of
porno tapes.
2. The tax maybe used to strengthen industries or
enterprises providing incentives. Remember
that taxation is not just about imposing taxes
but also it is about providing tax exemptions,
tax deductions. These are acts of taxation.
3. Taxes on imports may be increased to protect
local industries against foreign competition or
decreased to encourage foreign trade- The tariff
on Customs Code, when an imported article is
brought in the country and these articles are
sold in the Philippines for a cheaper price and it
affects the local industry-then the DTI or DA
will impose an ANTI-DUMPING DUTY whereas if
the imported articles were made by industries
subsidized by their government and were
brought in Philippines, the DTI or DA may
imposed a SPECIAL CUSTOMS DUTY upon the
said articles. To protect our local industries.
SAFEGUARD if the articles are not subsidized by
the government where they are made likewise
such articles do not violate the anti-dumping
law but there is a heavy importation of the said
articles then DTI or DA will imposed a
SAFEGUARD MEASURE.
4. It may be used as a bargaining tool
5. It may be used to halt inflation or lowered in
periods of slump to expand business and ward
off depression.
6. To reduce inequalities in wealth and incomes.
May the power of taxation be used as an implement of
the power of eminent domain?
****CIR vs Central Luzon Drug Corp. - Where the senior
citizens law. The senior citizens law grants discount of
20% so when the senior citizen pays, he or she only pays
the 80% so this law was challenged. So the question
now is how will the pharmacies recover the discount?
By the reason of the discount there is the taking of
ones property. In eminent domain, it is required that
when there is a lawful taking of property there should
be just compensation. So paano na yung just
compensation ng drug store? So now they will be given
what we call as TAX CREDIT in other words yung 20
pesos ng drug store ay puwede niyang gamitin as a tax
credit against its tax dues. So that is the just
compensation. So this case shows that power of
eminent domain can go hand with hand with tax power
whereby there is taking of property due to that 20%
discount and the just compensation is given through tax
credit. Under the amendment the discount now is no
longer use as tax credit but as tax deductions.
Principles or Cannons of a Sound Tax System
1. There must be fiscal adequacy- Sources of
revenue taken as a whole should be sufficient
to meet the varying levels of expenditures of
the government regardless of business
conditions or problems of economic
adjustments. In short, the tax system within a
state is one where the state has sufficient
resources of revenue , how is the sources of
revenue determined? By the sufficiency of tax
laws to meet the expenditures of the
government. The expenditures of the
government may expand or contract under
economic conditions of the state despite the
economic conditions of the state the revenue of
the state should expand and contract to the
needs of the government. In short, if there is a
shortfall on the revenue of the government it is
not wise to go directly to the Congress and ask
them enact laws which will raise the tax rates
(Last resort). Because your sources of revenue
requires for the purposes of fiscal adequacy
should be able and contract to the levels of
expenditures of the government regardless the
economic conditions.
****Chavez vs Ongpin- After EDSA, Cory Aquino came
out with this EO 73 wherein it authorizes local
government units to revise real property assessments
for the purposes of real property taxation because the
valuations used by the LGUs were 1978 valuations and
it was 1986 so purposes for fiscal adequacy LGUs were
not able to update their valuations so Cory came out
with such EO 73. It was challenged as unconstitutional.
The SC upheld that EO 73 is Constitutional- Without
Executive Order No. 73, the basis for collection of real property levied by the law-making body of the Sate by
property taxes win still be the 1978 revision of property virtue of its sovereignty for the support of the
values. Certainly, to continue collecting real property government and for public needs.
taxes based on valuations arrived at several years ago,
in disregard of the increases in the value of real Characteristics of Tax:
properties that have occurred since then, is not in 1. It is an enforced contribution
consonance with a sound tax system. Fiscal adequacy,
which is one of the characteristics of a sound tax 2. It is generally payable in money
system, requires that sources of revenues must be
3. It is proportionate in character
adequate to meet government expenditures and their
variations. 4. It is levied upon person, property or property
rights.
****ABAKADA vs Ermita-This is in connection with the
imposition of VAT. First it was 10% then later it became 5. It is levied by the law-making body
12% in 2005 under RA 9337. RA 9337 was challenged
for being unconstitutional for violation of due process 6. It is levied by the State which has jurisdiction
etc. One of the issues raised there was the application
7. It is levied for public purpose.
of fiscal adequacy. One of the issues there is the validity
of the imposition of 12% VAT rate being constitutional- Classifications:
raising the VAT from 10 to 12 % is not valid therefore
unconstitutional. The SC said that increasing the VAT a. Subject-matter
from 10 to 12% is the demand of the principle of fiscal
1. Poll Tax/ Personal Tax
adequacy. Sources of revenues must be adequate to
meet the government expenditures. There is a need of 2. Property Tax
proof to show that there is indeed violation of due
process and equal protection. The Court will not 3. Excise Tax
interfere absent a showing of arbitrariness,
b. Who bears the burden
unreasonableness and discrimination. RA 9337 is
equitable and uniformed within a particular class. The 1. Direct Tax-Whereby the statutory taxpayer
VAT is the anti-thesis of progressive taxation by its very pays the tax and shoulders burden of tax
nature it is regressive. Progressive taxation has no like income tax etc.
relation with the VAT system as the VAT is paid by the
consumers or the business regardless of its nature. The 2. Indirect Tax- Where the statutory tax payer,
Court could not strike down a law simply because of its the person who is liable to pay the tax s
looks. allowed to pass or shift the burden of tax to
another like VAT
2. There must be Theoretical Justice-Taxes levied
must be based on ones ability to pay.

3. Administrative Feasibility- It tells us that taxes Tax June 19, 2013

being burdens that system of assessment of
where you pay your tax etc. must be
CONVENIENT TO THE TAXPAYER. It should also Among others the important distinctions as of classes:
be just and it must be uniform in enforcement
by governmental officials etc. As to who bears the burden:

TAX- The burdens or charges imposed by the State. It is (a) Direct

an enforced proportional burden from person or
 (b) Indirect

As to determination of amount: A regressive system is one where you have

more indirect taxes than direct taxes.
(a) Specific based on a certain
standard of rate or measurement.
Like in the case of liquors/alcohol
Tax as distinguished from other terms:
products.

(b) Ad Valorem based on value

TOLL- different from a Tax (enforced burden or
As to purpose:
contribution imposed by the State)
(a) General
- The reconsideration you pay for the use of
(b) Special/ Regulatory property. When you pay a toll it does not mean
you are paying a tax.
As to scope:

(a) National
PENALTY where one is made to pay a penalty it does
(b) Municipal/ Local not have a similar concept as payment of the tax.

As to rates: A penalty is one that is imposed for violation of a law or

a certain regulation within which you are made to pay a
(a) Progressive
penalty whether the penalty would take into a form of
(b) Regressive imprisonment or payment of a fine or both. It is an
imposition of a certain sanction imposed by law or by a
(c) Proportional regulation. While a tax does not operate as a penalty, it
is an exaction or a burden but it is not an imposition of
As to the basis of ability to pay:
penalty it is an enforced contribution.
(a) Progressive tax

(b) Regressive tax

SPECIAL ASSESSMENT operates different from a tax;
special levy/ special assessment tax are terms not
actually in its technical sense a tax.
System of Taxation

Progressive system of taxation it is different

from a progressive tax or a progressive rate and when
we talk about a regressive system it is also different
from a regressive tax or a regressive rate because what
we are talking about is a system of taxation.
A progressive system is one where the system
of taxation is that it has more direct taxes than indirect
taxes. Most of the taxes in the system are direct than
indirect.
A special assessment or in local taxation they call it
special levy imposed by LGUs is a method or a mode
of recovery or reimbursement on the part of the
government when government would introduce
infrastructure development or public works projects.
Example of that is that in a far-flung place, government
would introduce a bridge or a road which before that
place could not be reached through a mode of
transportation then the government now constructed
public works project or infrastructure development.
Now as a result of that development, property owners
in that area were benefited by that project. The amount
spent by the government for that project is recovered
through the process or the method of the imposition of
a special assessment or a special levy for purposes
that the government would be able to recover the cost
of the investment or the cost of the project. The
government now after completing the project would
impose what we call as a special assessment.
Special assessment is therefore imposed to those real
property owners who will be benefited by the project. If
you are not benefited by the project, the assessment
would not apply on you. Another characteristic of
special assessment there is a period within which to
collect; normally a period of 10 years while tax the
imposition, the assessment or the collection of the tax
continues until the tax would be repealed or the rate/
law be amended. For as long as the tax law or the tax is
there enforced then the collection and the payment
continues but not in the case of a special assessment -
there is a limit as to time, it is only imposed only upon
the land and to the property owners benefited by the
improvement.
DEBT arises from a contract (express or implied) while
taxis written by law
- Non-payment of a debt, no person is
imprisoned but the person may be imprisoned
for non-payment of tax except the poll tax/
cedula/ residence tax
- As a matter of set-off or compensation: Debt
may be subject to set-off or compensation but a
tax cannot be subject to set-off or
compensation because there is no debtor-
creditor relationship between the taxpayer and
the State.
- Republic vs. Mambulao (4 S 622): Mambulao
Lumber operates a logging concession which
under its concession was subject to forestry
charges on account of the business it was
engaged in being a logging operator. Part of its
obligation as a logging concessionaire is to do
reforestation and the cost of reforestation
could be reimbursed against the government.
You have Mambulao Lumber having obligations
or taxes by way of forestry charges on account
of its activity as a logging concessionaire. On the
other hand, it has a claim against the
government for reimbursement on the cost of
the reforestation it has been doing on its
logging concession. So Mambulao now asks if
they could have a set-off or compensation. The
SC said that there can be no set-off or
compensation because the forestry charges/
taxes are not subject to set off or
compensation. There is no debtor-creditor
relationship between the taxpayer and the
government. SC disallowed set-off and
compensation. This ruling has been reiterated
in the case of Rep vs. Erita(?) (172 s 63) and
Franciavs IAC (162 s 753).
- In the case of Franciavs IAC, Francias property
was subject to expropriation proceedings by the
City of Pasay and Francia had obligations by way
of real property taxes. Since she has a claim
over the government of just compensation on
account of expropriation proceedings. Then she
now asks for set-off or compensation. The SC
did not allow set-off or compensation for the
same principle that taxes cannot be subject to
set-off or compensation.
- Later, this ruling was reiterated in the case of
Caltex Phil vs. COA (208 S 727), San Carlos
Milling vs CIR (228 S 135), Philex Mining vs CIR
(294 S 687).
- In the case of Philex Mining vs CIR, Philex filed
an application for tax refund or tax credit
because it overpaid for taxes- it asked for a
refund or tax credit. Philex also had obligations
for the taxes on its mining activity. Philex asks
to set-off the refund claim and the obligations
for taxes since both are taxes. The SC ruled that
even in a tax refund claim there is still no set-off
or compensation.
- Have that application for tax refund/ issuance
of tax credit certificate been approved, can you
 now ask for a set-off or compensation? It could
be YES because at that time (Philex) it was a
pending application but if it had been approved
then it can now invoke set-off or compensation.
- The only instance where the court allowed set-
off or compensation is in the case of Domingo
vs. Garlitos (8 S 443), the estate had a claim for
unpaid services by the estate of rice and there
was a liability or a tax to be paid on the part of
the government. Considering that the claim had
already been approved or money was already
appropriated to pay the estate then the court
allowed set-off or compensation because the
claim of the estate for the payment of the
services was already been approved and money
was already appropriated and set aside.
- When the claim of the government or taxes and
the taxpayer for services rendered had already
become due and demandable as well as fully
liquidated then compensation takes place by
operation of law in accordance with Art 1279
and Art 1290 of the Civil Code. Both debts are
extinguished in the concurrent amounts.
LICENSE AND FEEStaxes arise from the exercise of the
taxing power while license fees arise from the exercise
of police power
- Purpose: Taxes are for revenue; license fees are
for regulation
- License fees cannot exceed the reasonable cost
of regulation; taxes are not so limited
- In other words, to make a burden or a charge or
an imposition or an exaction in the nature of a
license fee the amount that is to be collected
should be a reasonable amount to cover the
cost of regulation, inspection and police
surveillance because if you go higher than that
then it is not anymore a license fee because the
amount of the license fee is regulated, must be
a reasonable cost. In the case of taxes, the
legislative body has the discretion in
determining the amount of the rate of the tax.
- License fees can only be imposed on legal
businesses or activities; taxes can be imposed
whether you are on a legal or an illegal
businesses or activities. License fees are
imposed to make your business activity legal or
because the purpose is to regulate so the
license fees are imposed on legal activities but
for purposes of taxation whether you are
engaged in kidnapping, ransom or a drug lord -
you have the obligation to pay taxes because
taxes are imposed either on legal or illegal
activities.
- Failure to pay a license fee makes the business
illegal but failure to pay a tax does not make the
business illegal because whether you are
engaged in a lawful or unlawful business you
are in an obligation to pay taxes.
(26:35) Diyankana time magsimulamanisan.
What are the important distinctions between License
Fee and Tax:
1. Determination as to the amount
a. License Fee- the restriction for the
imposition of the license fee is an amount
that is reasonable to cover the cause of
regulation. In the context of a license fee,
there are 3 kinds of license fees:
3 Kinds of License Fees:
1. License Tax this is purely a tax. The
purpose is to raise revenue. Example: motor
vehicle registration fees. They are called fees but they
are not in the nature of regulation or police power but
they are taxes.
2. License Fee to regulate a useful
occupation police power. The purpose is to
regulate. The state is to observe that the amount of
fees that is to be imposed for purposes of regulation
should be reasonable amount to cover the cost of
inspection, surveillance or regulation.
 3. License Fee to regulate a non-
useful occupation police power. The purpose is
to regulate.It could go over and above the requirement
of reasonableness because the purpose of a license fee
to regulate a non-useful occupation is to discourage
people from going into a non-useful occupation. The
guideline as to the reasonable amount is no longer
applicable. Such in the case of:
Physical Therapists Organization vs. City of Manila
(Aug. 30, 1957)
P 100 license fee was questioned because it was
too much. According to them, it was equivalent to an
act of taxation. The imposition of P 100 license fee for
that profession, aside from the constitutional limitation
on equality and due process, it was more of a nature of
a tax than a license fee.
The Supreme Court said: NO, the license fee
imposed here is not to regulate a useful occupation but
to regulate a non-useful occupation. If the purpose of
the regulation is to regulate a non-useful occupation,
then, you can go over and above the reasonable costs
of regulation and occupation to discourage people from
going into that kind of activity. The City of Manila is
preventing that the masseurs will be used as a house of
prostitution. Under the General Welfare Clause, the
LGU is authorized to enact ordinances to provide for the
health and safety and to promote morality, peace and
general welfare of its inhabitants. The amount charged
was properly considered in determining whether it is a
tax or an exercise of police power. The amount maybe
so large as to itself show that the purpose is to raise
revenue and not to regulate. But in regard this matter,
there is a marked distinction between the fees imposed
on useful and beneficial occupationwhich the sovereign
wishes to regulate and strict to those which are inimical
and dangerous to public health, in which case, the state
can impose fees so high without necessarily being a tax.
The practice of aesthetic and unhygienic massage is not
as useful occupation which will promote and is
conducive to public health and morals. There is no
violation insofar as due process and equality of the
treatment of that imposition.
Q: How do you determine whether the exaction or
imposition is an act of taxation or an act of regulation
(License Fee)?
A: The determination is made by going into the
primary purpose of the exaction. If the primary or
principal purpose of the imposition is to regulate, while
incidental revenue may be generated from that
imposition, it is still an exercise of police
power.Therefore, it is a license fee.Police power can go
along with the power of taxation. When the principal
purpose is to raise revenue, even if there is an
incidental act of regulation, it is an act of taxation.What
is to be determined is the principal or the primary
purpose of the imposition.
Such in the case of Progressive DevtCorp vs Quezon
City 172 SCRA 629
The QC enacted an ordinance imposing a 5% fee
on rentals of lessees in QC as supervision fee.
ProgessiveDevt Corporation, the operator of Farmers
Market in Cubao, owned by the Aranetas, questioned
the validity of the ordinance, claiming that the exaction
imposed by QC is not in the nature of a license fee but a
tax, and therefore it is prohibited and the ordinance is
null and void.
Issue: W/ the exaction imposed is a tax?
Held: the 5% supervision fee is for regulation and
therefore not a tax. The purpose of the exaction is
clearly to supervise the operation of a public market is
an activity which involves public interest. There is a
reasonable relation between the fee collected and the
probable cost of regulation because ordinarily the
higher the amount of stall rentals, the higher the
aggregate of food stocks and related item sold in the
privately owned market and the higher the volume sold
from that privately owned market, the greater the
extent and frequency of inspection. Thus the
supervision reasonably required is for the general
public.
Remember that in the principle that the amount for the
purposes of license fee is that it should be a reasonable
amount to cover the cost of inspection and regulation.
Is the 5% supervision fee a reasonable amount to cover
the cost of inspection and regulation? The SC said, YES,
because if you pay more rent then the 5% of that is
greater. If you pay a lesser rent, the 5% of that is also
less. Now, you are paying a higher rent because you are
occupying a bigger space and the bigger space you have
the more food stocks you sell then the cost of
inspection and regulation will be higher. Therefore, it is
reasonable probable cost of the inspection, regulation
and inspection. Therefore, it is a license fee.
In the cases of in Gaston v. Republic Planters Bank (158
SCRA 626) and PAL v. Edu (164 SCRA 320), An exaction
maybe both considered as a tax and a license fee.
However the imposition is a tax if the primary purpose
is for revenue and regulation is merely incidental, but if
the primary purpose is for regulation and the incidental
revenue is also being paid then it is not a tax but a
license fee.
Revenue- the funds generated by the government from
taxes, fees and charges.
Taxes at its generic sense, refers to internal revenue
taxes and customs duties or tariff.
Assignment next week is on the limitations.
June 25, 2013
LIMITATIONS OF THE POWER OF TAXATION
Remember that the power of taxation or the power to
tax is inherent in the sovereign. That this power is
legislative in character but the power to tax is subject to
limitations. Where the power to tax has a
comprehensive scope and far-reaching still having said
the power to tax is subject to limitations. We can
classify these limitations into:
1. Inherent
2. Constitutional
So these limitations posed restrictions in the exercise of
that power. So we go back to that principle that the
power to tax involves the power to destroy. To
safeguard the exercise of this power it was subject to
some limitations.
So what are the INHERENT LIMITATIONS?
1. You have the requirement of PUBLIC PURPOSE.
This means that taxes must be levied for public
purpose. So when the power of taxation is
exercised for public purpose. The requirement
of public purpose is the heart and soul of the
power to tax. So if the power to tax is exercised
for public purpose then whatever will be
enacted that would be the inherent limitation.
So what is this concept of public purpose? Anything that
is related to governmental purpose; a purpose affecting
the inhabitants of the state or taxing district as a
community and not merely as individuals. Because the
concept of purpose is very broad we could dissect this
through decisions which would determine whether or
not such law complies with the requirement of public
purpose.
***Lutz vs. Araneta-This case involves the enactment of
CA 567 or the Sugar Adjustment Act. The taxes imposed
under CA 567 are funds collected which are used for the
rehabilitation and stabilization of the Sugar Industry.
The purpose of the exaction is for public purpose.
Although such law was enacted for the Sugar industry it
does not violate the idea of public purpose because it
was enacted for the rehabilitation and stabilization of
the Sugar Industry which is also a national concern.
We also have the case of Gaston vs Republic Planters
Bank.
***Gaston vs Republic Planters Bank- This time it is
about the fee collected by the Planters Bank from the
millers. And the issue that was brought is whether or
not such fee is for public purpose. It is for public
purpose since the stabilization fees in question are
levied by the State upon sugar millers, planters and
producers for a special purpose that of "financing the
growth and development of the sugar industry and all
its components, stabilization of the domestic market
including the foreign market the fact that the State has
taken possession of moneys pursuant to law is sufficient
to constitute them state funds, even though they are
held for a special purpose. The tax collected is not in a
pure exercise of the taxing power. It is levied with a
regulatory purpose, to provide means for the
stabilization of the sugar industry. The levy is primarily
in the exercise of the police power of the State.
***Citizens Alliance vs. ERB-The issue of this case is
whether or not the establishment of the Oil Price
Stabilization Fund is for public purpose. And what is the
justification for it? The establishment of the OPSF is
within the pervasive power of the government and its
responsibility to secure to secure the of the
community. That comprehensive sovereign authority
may designate . The reduction of the price of
the petroleum, crude oil etc. clearly critical in
importance considering among other things the
continuing dependence to such commodity as a public
purpose. Now if it benefited the oil companies because
of the continuing high level of dependence of the
country to crude oil then it does not mean that the
OPSF was not created for public purpose (Please read
the full text of the case because the recording for this
part is not that audible) .
***COCOFED vs. PCGG- Are the COCO levy funds public
funds? In this case, the PCGG wants to sequester the
funds of COCOFED but the COCOFED contends that such
funds they have were private funds. So the issue here is
whether or not the COCO levy funds are public funds.
The Nature of the COCO levy funds are in the nature of
public funds. The proper management of the COCO
levy funds are within the government they were
collected through the police and taxing power of the
State. It cannot be denied that it is the welfare of the
entire nation which is one of the main factors of the
imposition of the COCO levy fund. It could not be
denied that the Coconut industry is one of the major
industries supporting the national economy. It is not
only a livelihood of a significant segment of the
population but also the export earnings which is one of
the imperatives of economic stability which clearly
affects the public industry. The Court ruled that the
COCO levy funds are subject to sequestration
proceedings (Please read the full text of the case for
more details on the ruling because the recording for this
part is not that audible).
***Planters Product Inc. vs. FertiPhil (548 SCRA 485)-
Planters Products Inc. and FertiPhil are private
corporations which import pesticides, fertilizers and the
like. Marcos came out with a Letter of Instruction
directing the FPA (Fertilizers and Pesticides Authority)
to impose a 10-peso levy for every bag of fertilizer being
sold. The proceeds of such levy will go to PPI. FertiPhil
pays 10 pesos per bag for every sale of fertilizer. The
FPA will give the amount (10 peso levy) to PPI. Now
after the 1986 EDSA, FertiPhil now demanded the
return of the amount it paid to PPI under the LOI but
PPI refused. So the issue here is whether or not the 10-
peso levy under the LOI was a valid tax collection?
Remember now that you will go back to the basics that
no matter whether the president has the taxing power
like in the case of Marcos it must be remembered that
in the imposition of tax it should always be for public
purpose. So the 10-peso levy was not a valid tax
imposition nor was it regulatory (Please read the full
text of the case for more details on the ruling because
the recording for this part is not that audible).
The Supreme Court said that public purpose is the heart
of tax law. It is the consent that can be hammered to fit
the modern standards and it does not only pertain to
purposes which are traditionally considered as
governmental functions such as construction of roads
delivery of public services etc. but it also includes social
justice like for the use of the relocation of squatters,
you have low-cost housing and urban housing as well as
agrarian reform. What constitutes public purpose is in
the light of the expansion of governmental functions.
The meaning of public purpose continually evolves. The
meaning continues to expand. So it does not only refer
to governmental functions. So this brings us to the case
of Binay vs. Domingo.
***Binay vs. Domingo-Then the Mayor of Makati
Jejomar Binay has this pauper burial assistance kung
saan kapag namatayan ay covered ng burial assistance.
This generous effort was put into question. COA co-
objected with such expenditure claiming that it was an
illegal exaction of government funds and this was not
for public purpose. So the matter went to the Supreme
Court. Whether or not the pauper burial assistance
program was a valid program which is for public
purpose. According to the Supreme Court it is a valid
program within the scope of public purpose (Please
read the full text for the reason of the ruling of SC)
However, there is a caveat for the pauper burial
assistance program of Makati to be within the scope of
public purpose-it should only be applicable to the
Municipality of Makati.
2. The second limitation is the NON-DELEGATION
OF THE LEGISLATIVE POWER OF TAXATION-In
other words the power of taxation is exclusively
legislative.
So remember that this limitation is subject to some
exceptions:
a. Under the Constitution: Congress may
expressly 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 (Sec. 28 (2),
Article VI, 1987 Constitution)
***In the case of Garcia vs. Executive Secretary-
Congressman Garcia questioned the Executive Order on
importation levy implemented by its either President
Ramos or Aquino. Garcia claimed that the President has
no taxing power because power of taxation is legislative
in character. So this was brought before the SC. The SC
said that the President has taxing powers under Article
VI of the 1987 Constitution.
The Tariff and Customs Code also provides the
mechanism of the exercise of this taxing power. Which
is reflected by the flexible tariff laws. Under this the
Congress may increase tariffs or decrease customs
duties.
b. Another exception is in the case of the local
taxing power. The Constitution on this point
states: Each local government unit shall
have the power to create its own sources of
revenues and to levy 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
government (Sec. 5, Article X, 1987
Constitution)-The LGUs has the power to
tax through a Constitutional grant. There
are two ways of granting the local
government units the power of taxation
either:
I. Constitutional Grant
II. Legislative Grant.

In our jurisdiction the power of taxation is granted to
the LGUs by Constitutional Grant. This is found in Article
X, Section 5 of the 987 Constitution.
So remember that tax laws are legislative in character
once it is enacted the executive shall implement the
said tax laws. Moreover, it is also the duty of the
executive to promulgate Implementing Rules and
Regulations regarding such law. So there is a need for
tax laws to enacted by the legislative body so the
initiative should come from the Congress however there
is another exception with this general rule that the
Congress has the sole power to initiate tax laws is the
Peoples Initiative and Referendum or RA 6735. Under
RA 6753 there are two ways whereby citizens can
initiate laws particularly tax laws without violating the
non-delegation of the taxing power. When we talk
about RA 6735 when we proposed peoples initiative
and referendum, initially we have to gather signatures,
now when it is enacted either revenue or a non-revenue
measure it is not merely taxation puwede other
initiatives. So whether you propose, you may amend or
repeal a law through peoples initiative and
referendum. So first you gather the needed signatures
then you go to the COMELEC after that if the signatures
were able to reach the required number by the
COMELEC then the COMELC will have a plebiscite. So
the proposal now is given to the electorate then there
will be voting of whether they are in favour or not and if
theres yes vote that would become peoples initiative
and referendum. However, there is also another mean
provided by the same law however this one is not that
popular, the indirect initiative whereby there is this
certain group of people (Petitioners) who will file a
petition for indirect initiative with the House of
Representatives then such initiative bill will undergo the
normal legislative measure but it will not be the
Congressman who will be the sponsor of the said
initiative bill but the petitioners who submitted such
petition. So these are the two modes under RA
6735.
3. TERRITORIALITY OR SITUS OF TAXATION-Which
the power to tax is limited only within the
territory or boundary of jurisdiction to tax. In
other words, the State has no extra-territorial
jurisdiction because we go back to the rule that
it is the law-making body which has the
discretion in determining the situs of taxation.
However, this limitation admits an exception
the personal tax. The OFWs in 1998, we do not
tax anymore the income of the OFWs because
they are already classified as non-residents
Filipinos since they are in abroad and it was
stated in the new law that the State shall not
tax the income of non-residents so this is an
example when the state exercises jurisdiction.
So even if the subject or object of tax is outside
State, the State can pursue or exercise personal
jurisdiction over that subject even if that
subject is outside the territory the State shall
afford to it similar protection and it should also
have similar benefits. So this is how the state
exercises jurisdiction.
4. INTERNATIONAL COMITY- This is in accordance
with the principle that a sovereign cannot tax
another sovereign. Now Sec. 12 Art. II of our
Constitution declares that the Philippines
adopts the generally accepted principles on
international law as part of the law of the land
and adherence to the policy of peace, equality,
justice, freedom, cooperation and amity with all
nations. Since the power of tax is inherent
among States then we could not tax other
sovereign. Moreover, there is also the principle
common usage among states that 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 and there is
also the principle of the non-suability of states
where it is useless to assess tax. This is a self-
imposed limitation due to public policy and for
practical consideration. So yung mga income ng
diplomatic corps at dahil sa US-RP Agreement
 yung mga income ng service men sa Subic are
not taxable.
EXEMPTION OF THE GOVERNMENT AGENCIES OR
INSTRUMENTALITIES- In other words, the State does tax
itself. This is a self-imposed limitation by reason of
public policy and some practical considerations. While
there is no law or prohibition that the State may not tax
itself, it is absurd and impractical for the State to tax
itself so there is this self-imposed limitation. This
immunity from taxation only applies for the
governmental functions whereby an agency exercises
governmental or sovereign functions. But when an
agency exercises proprietary functions like the GOCCs
operates public utilities and the charter of such GOCC
provides for a tax exemption then it has an immunity
from taxation but if the charter of any GOCCs which has
proprietary function does not provide for tax exemption
then such agency or instrumentality does not have any
immunity from paying taxes.
Constitutional Limitation
- The constitution is the a source of the taxing power
of the state. The constitution simply defines and
delimits this power to strike a balnce between the
power of the government and freedom of the
governed and to safeguard the latter from possible
abuse by the former.
- These limitations are not grants of the taxing
power, being the taxing power an inherent in the
state.
Purpose: to provide safeguard or system of check and
balance in connection with the way the state will
exercise the taxing power.
DUE PROCESS
Section 1. 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.
- This provision does not directly involves in taxation.
However, this is a limitation. WHY? It is because the
power of taxation is enforced contributions/burden
amounting to a taking of a property, which requires
to be afforded with just compensation and due
process.
WHAT IS REQUIRED FOR A VALID TAKING? There must
be a law that provide for the basis of taking. Pursuant
thereto, enforced contribution from the people cannot
be made without a law authorizing the same. Otherwise
there will be a violation of the constitution where tax
collection is made without any law enacted by
legislators authorizing such collection.
2 aspect that BOTH must exist
1. Substantive tax statute must be within the
authority of congress and it must be fair, just
and reasonable. There must be a law allowing
the taking.
2. Procedural- the law provides for a mechanism
and relief where you can challenge the
assessment of the charge.
a. Ex. Non-payment of tax by a delinquent
taxpayer. A delinquent taxpayer is
afforded with a notice and hearing or at
least an opportunity to be heard.
WHEN CAN THERE BE A VIOLATION OF DUE PROCESS
1. When a tax law is made to apply outside the
sovereign state
a. Could also be consider a violation of the
inherent limitation of territoriality. Tax
law should be applied within the
 territory. In this case, there is also a
violation of due process as well.
2. When the tax law is not for public purpose
a. In the case of Pascual vs Secretary of
works, government funds was
appropriated for improvement of a
private road which later on, was
subsequently donated to the
government. Will the subsequent
donation cure the defect of absence of
public purpose? SC RULED: No, that
money was set aside for publi8 purpose
for the benefit of private entities. Its
subsequent donation will not cure the
defect of lack of due process.
3. When a tax law is made to apply retroactively
a. GR: Tax laws should be applied
prospectively
b. Exception: 1. If retroactive is not harsh
and oppressive ( Castro vs Collector) . 2
If the law provides for its retroactivity
such as there is a legislative intent.
CASTRO vs Collector 4 scra 119
Maria Castro also known as Madam X questions the
constitutionality of War Profit tax law for being made to
apply retroactively. SC RULED: WPTL, is valid although
made to apply retroactively. It can be given such effect
because it is not harsh and oppressive.
EQUAL PROTECTION
Section 1. 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.
- This provision is not directly deals with tax. We
apply this because of the principle of equality
WHAT IS EQUAL PROTECTION? All person subject of
legislation shall be treated alike, under like
circumstances and condition but in privileged conferred
and liability imposed. It does not require that person or
property different in fact be classified under the law
although they were the same. What is prohibited is
class legislation or discrimination or favoritism.
Congress has a leeway/ disposition to
determine who rae to be taxed or not without violating
the equality so long there is no discrimination. Relate
this principle to Artcile VI section 28(1) of the consti.
EQUALITY vs UNIFORMITY
Arcticle VI Section 28.
1. The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
progressive system of taxation.
A. Uniformity- means all taxable articles or kinds or
property of the same class shall be taxed at the
same rate regardless of where they are found. A tax
is uniform when the same force and effect in every
place where the subject of it is found.
It does not signify an __ but a geographic uniformity.
Wherever the subject is found the tax shall be apply to
the subject or object where it is found.
IS THERE A DISTINCTION BETWEEN A UNIFORMITY AND
EQUALITY?
For the purpose of taxation, jurisprudence would say;
no, there none.
It means that for the purpose of equality, the congress
may validly calissify the subject or object provided the
classification to the following requirements:
1. Substantial distinction;
2. Germane to the purpose of the law;
3. Must not be limited to existing circumstances
only;
 4. Apply to all members if the same class.
CASES
Lutz vs Araneta
SC RULED: No violation
That the tax to be levied should burden the
sugar producers themselves can hardly be a ground of
the complaint. Indeed, it deprives rational that the tax
be obtain precisely from those who are to be benefited
from the expenditure of the funds desired for it. At any
rate, it is inherent in the power to tax that a state be
free to select subject of taxation and it has been held
that inequalities which results from singeling out one of
the particular class for taxation on exemptions infringes
no constitutional limitation.
Shell Co of PI vs Vao 94 Phil 397
SC RULED: No violation
Pertains to occupation fee. SC ruled it is a valid
classification not only under present condition but also
to future with a substantial similar situation.
The contention here that the ordinance is
discriminatory and hostile because there is no other
person in the locality who exercise such designation or
occupation is also without merit because the fact that
there is only one and no other person in the locality
who exercise such designation or calling does not make
the ordinance discriminatory or hostile.
Manila Race Horse vs De la Fuente
SC RULED: No violation
The Ordinance here pertains to the boarding
stables of race horses. It was question, Bakit boarding
stable lng mga race horses , bat wala ung ibang horses:
SC ruled: there is a valid classification for there is a real
and substantial distinction. So valid sya and not
discriminatory.
Association vs Municipal Board of Manila
SC RULED: there is a violation
Road users tax was only made to be paid by the
registered drivers of manila. So it was question bakit
kami lng ang bumabayad? SC RULED, the said ordinace
is null and void.
Ormoc vs __ February 17 1988
SC RULED: there is a violation
Sa pangalan pa lng ng ordinace here, it can seen
may discrimination na talaga. SC held that while at the
time the sugar deller is only the petitriuoner, it means
that future or new producers are not to be covered. So
here ,the ordinance is nuill and void. ( limited to existing
conditions lang)
Sison vs Ancheta
SC RULED: There is no violation
Pertains to gross qualified income tax scheme.
Here there are 3 classifiacation namely: Purely
compensated income eraners, self-employed and
professionals. Mas mataas and tax ng mga professionals
and it was questioned by them. SC held that said
ordinace is Valid
B. EQUALITY
Basis of taxation shall be the means of ones ability to
pay.
Note: our tax system is progressive. I means more direct
tax than indirect dba.
PROGRESSIVE SYSTEM OF TAXATION
Section 28. (1) The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive
system of taxation.
This concept is different form progressive rate.
Progressive tax rate are based on ability to pay while
regressive rate do not depend on the ability to pay,
example VAT.
NOTE: regressive rates/system of taxation is not
prohibited in the constitution.
Tolentino vs SEC
EVAT is not a violation of SEC 28(1) article VI. The
constitution does not really prohibited the exposition of
indirect tax which are like VAT , that is regressive. What
is simply provides is that congress shall evolves a
progressive system of taxation. It means that direct
taxes are to be preferred as much as possible, indirect
tax should be minimized.
CAN YOU GO TO COURT TO COMPEL CONGRESS TO
HAVE A PROGRESSIVE SYSTEM OF TAXATION? NO.
section 28(1) article VI is merely directive. The provision
is a moral incentive to legislation, so not mandatory.
SECTION 10 ARTICLE III- Non impairment clause
Section 10. No law impairing the obligation of
contracts shall be passed.
Non-impairment clause applies to taxation but not to
ED and PP. for the purposes of taxation, it does not
apply to private contracts. As a general rule , Non
impairment clause is superior to the power of taxation.
Taxing provisions cannot alter existing rights under a
contract.
Cassanova vs Hord
This pertains to tax exemption in a contract of
natural exploitation. There was a tax law which was
later enacted. SC ruled , no hindi mawawala ang tax
exemption nya because to do so would be a violation of
non impairment clause.
General rule: NIC is superior to taxation.
Exception: section 11 artcile 12 on franchise
Section 11. 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 vs SEC
 PAL question the VAT because the contract
according to PAL, hindi sya labot because of the NIC. SC
ruled that NIC is not applicable to PAL a being a public
franchise. Section 11 article 12 of the constitution
provides that the congress as may be to require can
alter, repeal contract involving franchises.
WHAT ABOUT PRIVATE CONTRACTS? Lets say si Dara
buy candies to BOM the supplier with 10% included
interest for the span 10 years. Subsequently a tax law
was enacted that instead of 10% magiging 12 na sya, so
EVAT. BOM alleges that Dara should pay more kasi sa
bagong tax law. Can she do that? INC should apply? SC
ruled that no, INC should not apply, kasi in this case it
involves a private contract relationship.
NON IMPRISONMENT FOR FAILURE TO PAY TAX
Section 20. No person shall be imprisoned for debt or
non-payment of a poll tax
Walang makukulong kapag di ka nagbayad ng cedula.
The provision is a prohibition againt imprisonment for
non- payment of poll tax.
July 2, 2013 8-9 PM
Transcribed by: Mae Bungabong
Constitutional Limitations (PART 2)
We are still on the limitations on the power to tax. We
have taken so far the constitutional limitations on due
process, the limitation on equal protection for requiring
taxation, together with this limitation on the rule of
uniformity and equity of taxation and that directive that
upon Congress to evolve a progressive system of
taxation. We also covered the non-impairment clause-
this limitation is superior to the power of taxation
meaning the non-impairment clause yields or the
taxation laws yield to the non-impairment clause but
not applicable in the case of franchise because franchise
is subject to amendment, alteration by Congress on
other words we could not invoke the non-impairment
clause when it involves franchises. Then you have also
the limitation on the non-payment of poll tax that no
person will be imprisoned for the non-payment of poll
tax.
Now to cover other Constitutional limitations you have
Article 6 Section 28 (3) of the Constitution provides that
charitable institutions, churches and parsonages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt
from taxation. ***So this time we have a direct
provision in the Constitution in connection in taxation
however this time the provision, it grants tax-
exemptions. Now, when you dissect the provision you
have here an enumeration of properties and you could
notice that these properties, in its generic sense are real
properties because it involves lands, buildings and
improvements. Now the concept of real properties as
provided in the Constitution is the same as to your
property. In the study of property you have the
enumeration of what are immovables, what are the
kinds of real properties. So what is the grant of
exemption here is the tax on the property but what is
the nature of the exemption? The property that would
be exempted from tax, when will it be used? Actually,
directly and exclusively one for religious second for
charitable purpose and for educational purpose. In
other words, the grant of tax exemption refers to
property tax exemption. The property tax on these
immovables but the exemption may come in when they
will be used for these purposes either for religious,
charitable or educational so that is the nature of the tax
exemption. Now remember while the power to tax is
inherent that power involves also the power to grant
tax exemptions. Now in the Constitution there is a grant
of tax exemption. So what is the nature of tax
exemption grant in the Constitution? This does not
need what we call an enabling law; there is no need for
legislation. Tax exemptions in the Constitution are self-
executory. You dont have to go to Congress for them to
have an enabling act of legislation to grant the
exemption because the Constitution already grants the
exemption but take note of the restrictions of the limit
of the exemptions. In other words, in connection with
this exemption it is not the ownership that determines
the exemption so even if the building is owned by the
Archdiocese but it is being rented to others for a lease
or for a rental or for a fee then that property despite
ownership is by the religious is not covered by the tax
exemption because the use is not for religious it is being
rented for commercial use so it will be not given an
exemption. In the same way that a non-stock, non-
profit educational institution owning a piece of building
but some portions of the building are being rented for
fees and lessees pay rentals for the use so even though
owned by a non-stock, non-profit institution
educational institution which is engaged for educational
purposes still that property would not be covered by
the exemption because of the use it was not actually,
directly and exclusively use for educational purpose, it is
not then covered by the exemption.
Now take note also, the grant of exemption while they
are or covers actually, directly and exclusively use for
religious, charitable or educational purposes the
exemption extends to those incidental to the purpose.
***You have that case of Abra Valley College vs.
Aquino (162 SCRA 106) where it has been asked in the
bar. Where the ground floor is being rented, the second
floor is being used as residence of the School Director,
the third and the upper floors were used as classrooms
so the question is the property exempted from real
property tax? In so far as to the third and the upper
floors they are covered by the tax exemption because
the use is for educational. In so far as the second floor
being used as the residence of the school director the
Court said that it is still covered by the exemption
because it includes those which are incidental to the
purpose while being used as residence the or that
residential use is inclusive or incidental to the
educational purpose of the institution so it is still
covered by the exemption. You also have the ground
floor; the ground floor will not be exempted because it
is not educational nor even incidental for the
educational purpose. So it will be taxable. The same
with the cases of Herrera vs. Quezon City Board of
Assessment (3 SCRA 186)
And the case of Hospital de San de Dios vs. Pasay City
(16 SCRA 226) wherein you have the charitable hospital
or institution which provides for living quarters,
recreational facilities for their doctors, nurses including
the medical staff so for their, for their goodwill of the
hospital of the medical staff of the hospital they provide
playing facilities like swimming pool, living quarters so it
was whether these facilities were covered by the
exemption. The Supreme Court said yes they are
because they are incidental to the purpose.
Now in the recent case of Lung Center where the
Quezon City assessed the Lung Center for real property
tax and within the Lung Center, you have the facilities of
the hospital and portions of the buildings were being
rented to the doctors of the hospital so they have their
clinics there and they pay rent to the institution so
Quezon City assessed the Lung Center for real property
tax so the Lung Center claimed for the exemption under
Section 28 (3) in the template the clinics, the portions
being occupied are being used by the doctors as their
clinics are still covered by this section. The Supreme
Court said no because the use of the clinics are for the
charitable purpose of the hospital and they are clinics
being rented by the doctors so they are subject to real
property tax. They are not covered by the exemption.
We also have the case of YMCA. Wherein the YMCA a
charitable institution allows the non-member of YMCA
to use the parking lot for a fee and it also grant lease to
those interested lessees to rent out some portions of
the YMCA building so the fees and the rentals were
collected and they claim the exemption so when this
matter reached the Supreme Court, the Supreme Court
said that they are not covered by the exemption and
they are not use for the purpose so they are subject to
tax.
Now take note that the exemption again while the
scope of property tax exemption covers those actually,
directly and exclusively use for religious, charitable or
educational purposes the extension of the exemption
includes those that are incidental to the purpose.
Now another grant of exemption but a constitutional
limitation, you have Article 6 28 (4) which provides that
no law granting any tax exemption shall be passed
without the concurrence of a majority of all the
Members of the Congress. ***This pertains now to the
enactment of a tax exemption statute, this the
ratification requires upon Congress. Now the set-up in
our case is that you have two houses, the Senate and
the House of the Representatives so what is the
Constitutional requirement for ratification? In the event
that a tax exemption is passed the voting requirement is
the concurrence of the majority of all Members of
Congress. To determine the majority, you dont have to
add all the members of the Senate and the House and
determine the concurrence of the majority vote of all.
In other words, we are not talking about the majority of
the quorum but the majority of all the members of
Congress. Now if you did not construe the concurrence
of the majority of the members by adding the members
of the Senate and the House of Representatives but the
two houses voting separately. So there must be a
concurrence of all the majority members of the House
of the Representatives as well as the concurrence of all
the majority members of the Senate. To have this tax
exemption statute to be allowed or to be passed
otherwise, it will not become a law. It will not be apply
because of that requirement. So that is the voting for
tax exemption. Now if it is just a regular revenue
measure you do not require anymore of the
concurrence of the majority members of the Congress
but the majority of the members constituting its
quorum because when the 2 houses meet there is a
quorum then if there is a quorum then it will do
business. And it will pass that piece of bill or legislation
for approval it will require the majority of the vote
unlike a tax exemption.
Now other Constitutional limitation is Section 19 Article
7 the power of the President. Except in cases of
impeachment, or as otherwise provided in this
Constitution, the President may grant reprieves,
commutations, and pardons, and remit fines and
forfeitures, after the conviction of final judgment. He
shall also have the power to grant amnesty with the
concurrence of the majority of all the Members of the
Congress. ***So a grant of amnesty may be done
through executive action or if the executive asks
permission under Section 19 Article 7 of the
Constitution.
You have also Section 5 (2b) Article 8. This is the power
of the Supreme Court in connection with tax cases
including other cases. This defines the extent of the
power given by the Constitution the Supreme Court
under Article 8 Section 5 (2b). Now in this provision the
Supreme Court shall have the power to review, revise,
reverse, modify, or affirm on appeal or certiorari, as the
law or the Rules of Court may provide, final judgements
and orders of lower courts in all cases involving the
legality of any tax, imposts, assessment, or toll, or
penalty imposed in relation thereto. In other words, in
connection with tax cases it is still the Supreme Court
which is the final arbiter. All tax cases whether it
emanates administratively through the executive
branches or through the executive part of the
government then it is brought from exhaustion of
administrative remedies to the judicial action still the
final say will be given to the Supreme Court. Because
they have that power to review, revise, reverse, modify,
or affirm on appeal or certiorari as the law or the Rules
of Court may provide, final judgements and orders of
lower courts all final judgement in all cases so this
include tax cases legality of any tax, imposts,
assessment, or toll, or penalty imposed in relation
thereto. So all these matters should be brought before
the Supreme Court for its final adjudication unless the
party did not bring it, it will attain its finality as law but
nevertheless anyone who bring it up ad pursue his
cause for further remedies the Supreme Court will have
the final say. In other words, for the purposes of
assessment and collection of the payment of the tax
Congress therefore cannot legislate that whatever the
decision of the BIR in so far as in assessing how much
tax will be paid by the taxpayer it will not legislate that
the decision of the BIR will be final and executory and
no longer could not be appealed or even review for
certiorari because that will be an encroachment of
Section 5 (2b) Article 8 of the Constitution. In other
words, the Supreme Court could not be deprived of that
power otherwise if you allowed that the executive that
their decision involving tax would be final and could not
be longer appealed, review before the Supreme Court
that is null and void because that is unconstitutional. A
violation of that provision.
Now other Constitutional limitation is Article 3 Section
5.xxxxxxxxxxxxxxx. The free exercise and enjoyment of
religious profession and worship, without discrimination
or preference, shall forever be allowed.
xxxxxxxxxxxxxxxxx . In other words as ruled in American
Bible Society vs. City of Manila (101 PHIL 386) the
power of taxation yields to the free exercise of the
religious profession and worship. So freedom of religion
is superior to the power of taxation. Now in the
American Bible Society case the sale of Bibles and other
religious literature by religious organizations although
have a little profit could not be consider taxable
transaction for it will be violative of the Constitutional
provision which guarantees to freedom of religious
profession and worship. Now when you relate the
American Bible Society case to Tolentino vs. Secretary
of Finance (235 SCRA 613) and the ruling for the MR is
249 SCRA 628. One of the petitioners in the case of
Tolentino because there are 9 consolidated cases yung
title lang is Tolentino vs. Secretary of Finance. These
were also decided and related. So one of the petitioners
there was the Philippine Bible Society and under RA
7716 in the expansion of the Value Added Tax one of
the transactions which wherein it covered the taxation
on the imposition of the VAT on the sale of publications,
published works and articles, magazines and
newspapers and etc. together with the Philippine Bible
Society we also have the Philippine Press Club which
questioned the taxation or the imposition of the VAT on
the sale of newspapers which will encroach upon the
freedom of speech. Now the case of Philippine Bible
Society the tax imposition on the sales of the Bibles will
now violate the Constitutional provision on the freedom
of religion against taxation. The ruling rendered in that
case of Tolentino, it abandoned the decision of the
American Bible Society case. Because this time the VAT
now is imposed upon the sale of publications, articles,
magazines including the Bibles. See this now is a
violation of the freedom of religion thus, you may now
abandon the American Bible Society case. The Court
said no while it is directly not saying that we abandon
the American Bible Society case is still a valid ruling. In
other words, there was no abandonment of the ruling
of American Bible Society case but can we still tax
without abandoning the American Bible Society case,
can the government still tax the sale of the Bibles by
PBS without violating the freedom of religion? Now
how did the Court rule on this? Now the withdrawal of
the exemption did not violate freedom of religion so
when the VAT now under RA 7716 included the VAT on
the sale of books, articles, including the Bibles such
withdrawal of exemption did not violate the freedom of
religion. As in the case of the Philippine Bible Society on
religious articles as the free exercise of the free religion
clause does not prohibit imposing generally applicable
sale of tax in the sale of religious materials by religious
organization as held by the US Supreme Court in the
case of Jimmy Swaggart Ministries vs. Court of
Equalization because in 1990 the US Supreme Court
ruled that the religious organizations in the US would be
subject to tax as held by the US Supreme Court in the
case of Jimmy Swaggart Ministries vs. Court of
Equalization. So you could tax them without violating
freedom of religion because imposing a generally
applicable sale or use of tax of the sale of religious
articles by religious organization is not violating the free
exercise of religious laws so it will not result to a
prohibition following that US ruling. Now the VAT
registration fee did not constitute censorship of such
freedom of press and freedom of religion as held in the
American Bible Society case. The fee is mere
administrative fee and not imposed on the exercise of
privilege much less as a Constitutional right but for the
purpose of mere cause of registration which is a
requirement and central picture of the VAT system so as
to provide tax records, tax credits because when you
are under the VAT system the VAT taxpayers are
required to register and they are made to pay a
registration fee so it was the contention by the
Philippine Bible Society that the VAT registration fee
aside from the tax would also result for the violation of
the freedom of religion but imposing upon them the
VAT registration fee which would render a violation of
the free exercise of religion guaranteed by the
Constitution again the Supreme Court ruled otherwise
that the registration fee does not constitute censorship
to such freedom. The fee is a mere administrative fee
and not imposed on the exercise of freedom much less
a Constitutional right but for the purpose of praying
cause of registration and a requirement of the VAT
system. Now, however, after this ruling the Congress
reviewed insofar as the VAT on books, newspapers and
other publications noh reviewed and removed from the
VAT system the taxation on the sale of books instead
they came out with another legislation on the
treatment on the treatment of so far books and other
publications, newspapers, printing and publication of
books etc. so they were taken out from the VAT system.
Another Constitutional limitation is Section 29 (2)
Article 6 of the Constitution which provides for the
prohibition of appropriation for religious purposes. So
cause for the separation between the Church and the
State, the State therefore could not appropriate money
or set aside money for religious purposes because that
would be unconstitutional so there is a prohibition
against appropriation for religious purposes however
not in cases to those employed in the Armed Forces, to
the leprosariums, and other government facilities and
institution. What about the payment of the wages does
this now infringe upon the Constitutional provision? The
Supreme Court said no. Because the payment of wages
to the religious kasi nga may mga pari sa Armed Forces,
may mga pari sa mga penal colonies, sa mga
leprosariums and other government facilities and
institutions so may suweldo sila so money is
appropriated para bayaran sila and that is not within
the context of the prohibition under Section 29 (2)
because they are in payment for services rendered
without violating the prohibition. And of course, you
have to pay their wages, their food, their shelter, their
clothing so they are payment for services rendered.
So you have also Section 4 (3) and (4) Article 14 of the
Constitution. The prohibition against taxation of non-
stock, non-profit educational institutions. Now that is
under Article 14 the exemption of non-stock, non-profit
institutions now under Section 4 (3) of Article 14, all
revenues and assets of all non-stock, non-profit
institutions use actually, directly, and exclusively for
educational purposes shall be exempt from taxes and
duties. Upon the dissolution or cessation o]f the
corporate existence of such institutions, their assets
shall be disposed of n the manner provided by law. The
first paragraph deals with the non-stock, non-profit
educational institution and it grants exemption from tax
on their revenues and assets and duties which are use
actually, directly, and exclusively for education
purposes. This is a grant of tax exemption for non-stock,
non-profit educational institutions. Question: Is the
grant of tax exemption under this article or does this
grant more exemption than the grant of exemption
under Article 6 Section 28 (3) on property tax on
educational institutions? Now, if educational
institutions are removed from Section 28 (3) Article 6 do
they still enjoy property tax exemption under Section
4(3) of Article 14? Now, in so far as the scope of
exemption Section 4 (3) of Article 14 grants more
exemptions in so far as non-stock, non-profit
educational institutions. Unlike in Section 28 (3) of
Article 6 yung exemption diyan is property tax lang pero
yung grant ng non-stock, non-profit educational
institutions grants more kaysa yung nasa Article 6
Section 28 (3). Now, yung exemptions cover all
revenues so what are these assets? Mga properyt ng
mga non-stock, non-profit institutions if they are use for
educational purposes exempted in other words, even if
they were excluded insofar as educational institutions in
Section 28 (3) Article 6 maski wala sila doon meron din
naman sila dito sa Section 4 (3) they are entitled for
property tax exemptions and more pa. It includes
income tax and others for long as the revenues and
assets are used for educational purposes. So does this
include indirect tax? So when a non-stock, non-profit
educational institution would purchase materials for the
construction of building while they may be removed
from the VAT? The answer is no they are still covered by
the VAT because that is an indirect tax, it would be
charged and pass on to them. But not in the case of
direct tax, insofar as direct taxes that is their
exemption. For direct taxes they are covered by the
exemptions but not for the indirect. Now, what about
importation, when they are made to pay customs duties
still it includes the generic for taxes so their exemption
covers as well as tariffs and customs duties so when
they import for as long as they are for educational
purposes that is covered by the exemptions. Now the
grant of exemption here, granted by the Constitution is
automatic even if you dont have any action of
legislation to grant exemption but to avail of the
exemption you could not just go and invoke, I am
invoking Article 14 Section 4 (3) and I should be
exempted. No! But to apply for a tax ruling you write
to the Secretary of Finance, let us say the school for
their buildings instead of buying steels locally we would
like to import steels from abroad so their imports came
from abroad they will write now to the Department of
Finance and ask for a tax ruling that they are importing
as this much and they will ask for exemptions, the DOF
will reply of course the school will invoke Section 4 (3)
Article 14 because this section refers to all revenues and
assets for the exemption of taxes and duties so
whenever you import like for example bakal hindi
naman yan for educational purpose yes, but we are
putting up a building which is for educational purposes
and that is covered by the exemptions the DOF would
grant the tax ruling given the tax exemption so what
they import now and if there is tax ruling then hindi na
kayo i-aasess for tax duties. The same way also what
about for income tax noh so you have now a building
the ground floor and the second floor are used lease,
pinaparentahan, pinapaupahan, incomes are earned, is
their income taxable? So now, what is the grant of
exemption? The grant of exemption refers to all
revenues and assets which to be used for educational
purposes. So yung kita nila from commercial spaces and
they are brought in back to the institution and used for
scholarships, used to purchase buses, used to construct
classrooms then it will be covered by the educational
purpose then it will be exempted but if the income will
not be used for educational purposes then it will be
covered, it will be now taxable. Now in the YMCA case
the Supreme Court laid down the 2 requisites for the
grant of exemption under Article 14 Section 4 (3):
1. It is a non-stock, non-profit educational
institution.
2. The income, the revenues and assets were
used for educational purposes.
So having been utilized for education purposes then it is
covered by the exemption. Now tuition fees collected or
even rentals generated for its commercial activities co-
mingled and deposited in the bank and earned
interests, that interest income will also be covered by
the tax exemption because the scope is very
comprehensive, all the revenues and assets it includes
therefor its interests income from bank deposits, when
it uses their incomes to provide for its needs, buy shares
of stocks and they have their money market and income
is earned and the income is still use for educational
purpose then it is tax exempted because the key there
is ano ang utilization ng lahat ng kita, if the utilization or
the use is for educational purposes then it is covered
according to this section otherwise if it is for other use
then it will be taxable. At the end of the school year
insofar as non-stock, non-profit educational institutions
they are, as part of their reportorial requirements when
they file income tax returns of course they are
exempted but they still have to file information return
because when you are exempted from tax it does not
follow that you are exempted from filing an information
return. When we go to the exemptions you will learn
that exemptions are construed strictly so if exempted ka
sa tax, yun lang ang exemption mo, it does not cover
filing for the requirements. So you have still to file a
return unless the law gives you that exemption from
filing tax returns so they file tax returns but they dont
pay the tax because the utilization of all the income that
they have derived from educational and non-
educational income and if they are used for educational
purposes then it will be covered by tax exemption. So
that is the scope of tax exemption. Now big schools are
assessed by BIR for income tax, for VAT, for etc. kasali
yata ang Ateneo, there were cases but all of these cases
were dismissed because the schools were able to show
the utilization even if you have earned income from
your non-educational activity, you have commercial
spaces being rented by others for as long as the income
is utilized for educational purposes then it satisfies the
Constitutional grant of tax exemption.
JULY 03, 2013 Tax I Lecture
Lets go back to the provision on the exemption on the
non- stock, non- profit educational institutions. Art. XIV,
Section 4 (3,4) is a grant of tax exemption given to non-
stock, non- profit educational institutions.
xxxx
(3) 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.
(4) Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used actually,
directly, and exclusively for educational purposes shall
be exempt from tax.
When the educational institution that would be
referred to here would be a proprietary educational
institution, the paragraph 1 of the provision will not
apply. Even the 2nd paragraph. So proprietary
educational institutions are stock educational
institutions, example of which is those cooperatively
owned or those organized by a cooperative, may be
subject to tax exemption with limitations provided by
law. So there must be a law defining the extend of the
exemption of those proprietary educational institutions,
including restrictions on the dividends and provisions on
investments. The law on the restrictions or the scope of
exemptions is in the NIRC, the National Internal
Revenue Code. It is the NIRC in Section 27b which will
provide the scope of the limitation in connection with
the exemptions of proprietary educational institutions.
Briefly, in so far as of proprietary educational
institutions, are not entitled to full exemptions but they
are entitled only under the law, the NIRC, of a
preferential tax rate. In other words, they are still
taxable kasoyung rate nila is lower lang than the regular
corporations. So they are entitled to a preferential tax
rate. Under the condition that led pre- dominant
income are educational income. So if you are a
proprietary educational institution but your pre-
dominant income are non- tuition income, like rents,
over 50% of your income are non- educational then you
will be subject to the regular corporate tax. But if the
proprietary educational institution has a pre-dominant
income of tuition income then you will enjoy the
preferential treatment at 10%. So that is the law that
will provide in so far as the privileges and benefits that
will be given to proprietary education.
Then in Section 4, Art. XIV, subject to the conditions
prescribed by law, all grants, endowments, donations,
contributions used actually, directly, exclusively used
for educational purposes shall be exempt from tax. This
refers to the donors tax. The NIRC on the provisions on
the donors tax will provide the scope of the exemption
on what conditions or restrictions on the exemptions
will be allowed. It is the law that will provide for the
conditions for the exemptions. In other words, in the
different set- up of educational institutions, it is the
non- stock, non- profit educational institutions which
enjoy the most exemptions. So it is practically
exempted from direct taxes, including customs duties,
as long as they are for educational services.
What are the other constitutional limitations?
You have Section 24, Art. VI is in connection with the
ORIGIN of A REVENUE or TAX MEASURE. In Section 24,
Art. VI, it provides that 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.
So in Section 24, Art. VI, when it involves
appropriations, meaning when the government now fix
the budget or when there is a proposal for a tax
measure, we call this as revenue or a tariff bill in case of
customs duties. When we deal with taxation there is
revenue. It is required under the constitution that these
bills shall originate exclusively from the House of
Representatives. In other words no revenue measure or
any proposal to amend, repeal any tax laws or the tariff
and customs code, it is unconstitutional if they will be
introduced first by the Senate.
With this constitutional provision, does this mean that
the House is superior than the Senate? It does not mean
that the House is superior than the Senate. With the
last part of the said provision, despite the exclusive
origin in the House, it does not deter the Senate to
propose or concur with amendments. In other words,
there will be a revenue measure in the House, then the
Senate may do its counter- part.
Going back to the case of Tolentino, there are several
constitutional issues and constitutional tax limitations
issues. In connection to Section 24, Art. VI, Sen.
Tolentino questioned the validity of RA 7716 or the E-
VAT, claiming that the VAT law did not originate from
the House of the Representatives. To put it simply,
there was a tax measure introduced in the House. The
Senate has its own version of the E- VAT. In the
constitution, since you have two houses in Congress,
these two bills will eventually be consolidated and it will
be called a bicam or a bicameral conference
committee. The bicam now will address the
consolidation of the bills so that one revenue measure
will be consolidated and its draft now will be presented
to the two houses. However, the draft that came out
was different from the house version and from the
senate version. So the final draft bill which resulted
from the bicam was different from the house and
different from the senate. So when it was signed into
law, Tolentino questioned the validity of that law
because that law did not satisfy the requirements of
section 24, article 6, because what was the contention
of Tolentino is that it was a third bill that come out from
the consolidation. So, is there a violation of this Section
24, Article VI? The SC ruled on this that the Congress
has complied with the requirements of Article VI,
Section 24, despite that the consolidated bill was
different from that of the House and even the Senate.
A bill originating in the house will undergo such
extensive changes in the Senate that the result maybe a
rewriting of the whole. As a result of the Senate action,
a distinct bill maybe produced and to insist that a
revenue statute maybe substantially the same as the
house bill will be to deny the senates power not only to
concur on amendments but also to propose
amendments. It would be violative of its co- equal
legislative power of the two houses or for to allow that
would make the house superior to the Senate. In
other words, even if the draft that came out was
different or some of the features came from senate, still
it is valid since they are co- equal. For as long as the bill
originated from the House this does not prevent the
senate from making amendments. It may concur with
the version or may have its own version for as long as it
has the same title.
There is no basis to compare the power of the two
houses. Legislative power is vested in Congress
consisting of a Senate and the House of the
Representatives not in any particular manner. There is
no difference the Senate reserving the up to the
enacting clause and writing its own version up to the
enacting clause and at the other hand, separating a bill
of its own on the same subject matter. Kasi even if iba2x
ang version nila for as long as it is a bill from same
subject matter, this will not violate section 24 of Article
VI. In either case, the result will be two bills on the same
subject matter. The constitution simply means that the
initiative for filing revenue, tariff or tax bills authorizing
for an increase of a public debt, bills of local application,
and private bills, shall be from the House of
Representatives, but that does not prohibit the Senate
of a substitute bill in its anticipation of a receipt of a bill
from the House.
This issue was raised when the VAT was further
expanded under RA 9237. They presented the same
issue. Take note of the ruling on the case of Tolentino,
no violation of Section 24, Article VI.
You have Section 26 (1), Article VI, in connection with
the abovementioned, while it is generic in every bill as
we apply it to tax bills or revenue measures, every bill
passed by the Congress shall embrace only one subject
which shall be expressed in the title thereof.
Then you have presidential taxing power, Article VI,
Section 27 (2), 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.
You have Article VI, Section 29 (3), 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.
This is because there are revenue measures that are
targeted for a specific subject or object of taxation
where the money that will be raised will be set aside for
a special fund and for special purpose. So the revenue
that will be generated will only be spent for that
purpose. If the purpose for which that special fund is
created has been fulfilled or abandoned, the balance
shall be transferred to the general funds of the
government. Because ordinarily, any tax measure that
has been enacted by the Congress, once it has been
implemented, revenue will go to the coffers of the
government, which is the general fund and from that
general fund, there is now there then the government
will make an appropriations act, set up a budget on
what will be the needs of the government. So where do
they get the money? Of course from taxes, fees and
charges.It is sourced out from the general fund.
But if the revenue measure or tax law is for a special
purpose, it is for a special fund then hindiyangagalawin.
It will not go to the general funds of the government or
coffers of the government but it will set aside. In other
words parang restricted naperayan for a special
purpose.
Then you have Article VII, Section 21, No treaty or
international agreement shall be valid and effective
unless concurred in by at least two-thirds of all the
Members of the Senate.
Now, a state may enter into a tax treaty with another
state, for purposes of reducing the effects of multiple or
double taxation. It is because a subject of taxation
maybe taxed in the Philippines and at the same time
taxed in the place where that income raised. For
example, when the state now would invoke the national
jurisdiction on that subject person like before 1998, the
OFWs or the non- resident Filipinos who are earning
income abroad will be taxed in the place where they are
working and he will be taxed in the country where is a
citizen of. So, if Pinoyxa, even if he is not in the
Philippines, he will still be taxed by the government and
in the country where he is residing, pwede i-tax pa
rinxa. So, yung impact on that person will be he will be
taxed twice. He will be taxed in the country where is
residing and he will be taxed in the country where he is
a citizen. So you have the effects of double or multiple
taxation. So reduce this burden, one of the remedies is
to enter into this tax treaty. The constitutional issue
now is, is a tax treaty subject to Senate ratification?
Generally, tax treaties are mere executive agreements.
So they do not require section 21,article VII or senate
ratification. Unlike the Rome Statute or of WTO, these
require Senate ratification. But when the government
enters into a tax treaty with another sovereign for
purposes of reducing the impact of taxation, while it is a
treaty or an international agreement, it is not of that
stricture that it will require Senate Ratification under
Section 21, Article VII. Kasi executive agreement lang
man xa. Unlike an international treaty, where even if we
are signatory, it will not be binding if it is not ratified by
the Senate. But not in a regular tax treaty. Tax treaty
will just be signed by the president or even the
Secretary of Finance as alter ego of the President
without the need of Senate Ratification.
In connection with Local Governments, we have
discussed this already, in Article X, Section 5, Each local
government unit shall have the power to create its own
sources of revenues and to levy 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. That is the
power of taxation given to LGU. That is a constitutional
grant. Now your Local Government Code operates as a
guideline as to the scope and limitations not the grant
of power. The grant of taxing power of LGUs is given by
the Constitution.
Then you have Section 11, Article XIV. This requires
legislation. It provides, The Congress may provide for
incentives, including tax deductions, to encourage
private participation in programs of basic and applied
scientific research. Scholarships, grants-in-aid, or other
forms of incentives shall be provided to deserving
science students, researchers, scientists, inventors,
technologists, and specially gifted citizens.
Still we go back to that basic principle that the power of
taxation is legislative because there must be an act by
the Congress or legislation for an enactment of tax law.
While the power of taxation is inherent, it still needs
enactment of laws.
For next week we will take up Situs of Taxation, Double
Tax, Escape and the Exemptions.
Taxation July 9 2013
TAXATION SITUS
Situs of taxation- It is the place of the taxation. The
place where the state exercise jurisdiction to tax a
person property or property rights. The difference
subject or object of taxation, we have situs of taxation.
It is the nature of lawmaking body which is the power
to determine situs on how the basis to tax or activity to
tax or the protection and benefit that it will afford still
to the object or subject of taxation. The determination
of the situs is also given to the legislature body. Of the
difference subject or object of taxation, we have
Person, property and property rights
1. Person- The place of taxation or situs is the
residence. This is usually the basis of situs.
2. Property- the situs of taxation is the place where
the place is located. ( Lex rae sitae- ART 17 of CC)
a. Personal property
i. Tangible The place where the
tangible personal property is located
ii. Intangible ex.. shares of stocks. As a
GR, the rule follow is mobilia sequitor
the thing follows the owner.
However, aside from such, another
rule for the purposes of determining
the situs of Intangible personal
property, the place where the right is
exercise. As the case of Forbes vs
bank, where there was a foreigner
who died based abroad who has
stocks in the Phil, when the latter
died in abroad and among the
properties left behind is the shares of
stocks in the Philippine, there the
problem starts. If we follow the
mobilia rule, the thing follows the
owner. However that rule was not
applied. They apply the rule in the
place where the right is exercise.
Despite the decedent was a
nonresident alien but there was the
property of the decedent behind in
the country, the Philippine tax is
applied by applying the rule the situs
is the place where the right is
exercise When is the right exercise?
Since the shares of stocks is subject to
Philippine protection, the shares of
stocks shall be subject to Philippine
taxation.
b. Income- Usually the situs is on the basis of
citizenship. If you are an alien and youre a
resident in the Philippine, you will still be
subject to Philippine tax be reason of your
residency. So for the purpose of income
taxation you will be taxed be reason of
your citizenship, second residency and the
third one by reason of the source of
income. This means that even you do not
reside in the hilipines for as long that your
source of income is in the country, you will
be charged by Philippine tax.
c. Business or exercising ones occupation or
taxable transaction - the situs is where the
business or occupation or transaction is
exercise.
d. Gratuitous transfer of property- Under our
tax code, there are 2 mode of transfer. 1st,
is the transfer that takes effect upon by
then (succession) and 2nd transfer by way
of donation (act of liberality). For purposes
of the situs of gratuitous transfer of
property, the situs is on the basis of
citizenship. If you are a citizen in the
Philippine and even if you died in abroad
and made a donation there, you property
is subject to Philippine estate tax. If you
are an alien, you will still be subject or your
estate to tax in case of death, or you made
a donation, you will be subject to the
Philippine by reason of residency. The 3rd is
the location of the property. Even if you
are a nonresident alien and you made a
donation over a property located in the
Philippines or upon you death one of the
properties left behind is in the country,
such property shall be subject to donor or
estate by reason of its location in the
 Philippines. In this case, the situs is either.
1. Residency, 2 citizenship or 3 the
location of the property.
MULTIPLICITY OF SITUS
What about the principle or concept of Domicile?
Wherein the object of taxation will be subjected to
several taxing condition. That one subject or object will
be taxed twice. You have the effects of multiple situs or
Multicilicity of situs by reason brought about by what
you called in various domicile. As a consequence of
such, that subject or object will be taxed more than
once, or be taxed by different jurisdiction that causes
burdens. And that would burdensome on the part of the
taxpayer. For purposes that the state will reduced or
lessen the burden of the multiple situs, the state may
provide (some brought by legislation) remedies. The
following are the remedies:
1. Tax exemption- Ex. Of this this the case of OFW.
OFW before 1998, their income is subject to
Philippine tax. So if they are working abroad as
a nurse, their income is subject to US tax law
and that same income by reason of citizenship
is subject to Philippine income tax. After 1998,
we grant now tax exemption. We will not
covered anymore income tax by our
nonresident citizen or OFWs. Aside from that in
your NIRC, since the OFW sends money, and
they set up foreign currencies, kung nandun
nayan sa banko sentral, that money there ,,
that is the law granting tax exemtion in order to
reduce the or lessens the burden of the
multiple situs.
2. Tax deduction- ex. Is to allow the tax you pay
abroad to be deducted against your gross
income. Similarly, prior to 1998 when a
nonresident earn to income abroad I said a
while ago it will be subject to Philippine income
tax. Since a foreign income tax is paid, the
Philippines grants a tax deduction of the foreign
income. The income tax pay sa abroad, that will
be in a form of deduction to lessen the burden.
We allow the foreign tax pay as a deduction to
the gross income.
3. Tax credit- the foreign tax paid is creditable
against the Philippine income tax. since a part
of that was already paid abroad by , the foreign
income tax will be creditable in the Philippine
income tax. Similar in the Citizen case, 1st by
way of tax credit. Now what we apply is the tax
credit.
4. Tax treaty On the basis of Reciprocity- a Filipino
who residing/ earning in that country and
citizen of that country residing / earning in the
Philippines may grant exemption or deduction
on the basis of reciprocity.
DOUBLE TAXATION
What is double or multiple taxation?
Double taxation is
- taxing twice
- by the same taxing authority
- within the same taxing jurisdiction
- for the same purpose
- for the same period or year; and
- for the same property.
All the elements must be present and absence one one,
there would be no double taxation.
Is double taxation prohibited? No our constitution is
not prohibited and not unconstitutional.
In what way therefore can you attack the law that will
result to double taxation? You cannot attack the law on
basis of double taxation. You can attack the law on the
basis of violation of constitutional or inherent
limitation.
When you enter into a deed of sale over a property, the
taxable transaction that would resolve since that the
same will be subject to 6% capital gain tax and the said
sale be subject to documentary tax ( Both found in the
NIRC), does it involves a double taxation? No, THE 6%
capital gain stocks while the same taxing authority ( BIR)
with the same jurisdiction for the same property does
not amount to double taxation. Absent ang element na
for the same purpose. The 6 % capital gain tax is a form
of ___ and the documentary tax for entering into that
transaction. So different and purpose.
To go further that same deed will be subject to tax in
the registered of deeds by the local government. Mga
maring tax dyan, now does this amount to multiple
taxation? Nag tax ung BIR, LGU there are two
authorities. No double taxation kasi different
authorities. One is a national government while the
other is in local government. Aslo different ang
purpose.
Principles or forms of escape from taxation
This is by reason that taxes are burdens. We want to
avoid taxes. Considering this being enforced, tax payers
finds ways of some mode to avoid it. Here you must
note that these modes are peculiar or not true to all
transactions. They are only applicable to certain
transaction.
1. Shifting
2. Capitalization
3. Transformation
4. Evasion
5. Avoidance
6. Tax amnesty
Shifting- transfer of tax burden by the person who it is
imposed by law to another person. It is peculiar to
indirect taxes. It is only in the case of indirect taxes
where shifting is based. Ibig sabihin pinaasa mo ung
taxe impact to other person. So peculiar or typical sya
sa taxes Like vat, the vat is a tax liability of the statutory
payer which is the seller of such product. That sale will
be subject to the vat. However Being an indirect tax the
vat could be pass and added to the price, so the value
now of the product contains the tax because the
taxpayer is allowed to shift the burden of the tax to
another. It is peculiar but to the case of indirect taxes.
When we talk about income tax / donor tax etc., this
cannot be shift to other. You will be the one to shoulder
the burden.
Shifting may take form to
- Forward
- Onward
- Backward
Like if we say in the case of VAT when the tax is pass on
to the consumer as part of the selling price it is a
forward shifting. But when the tax is absorbed by the
person whom should be liable. That is a form of
backward shifting. But when you encounter as series of
shifting whether continuous or not, that is what we
called onward shifting even if the direction is in
backwards. It happen when the tax is shifted 2 or more
times either backward or forward.
How do we know the shifting process.. ( here comes the
table)
You have the producer and the selling price is 100 and
the vat of %12. This 112 product. In the hands of the
producer ito ung total cost. So sa distributer lalagyan
yan ng another mark-up to make a profit plus the VAT,
then that would be the new selling price. Now he sells
that now to the wholesaler. The same process lalagyan
nya to make a profit plus the VAT, then that would be
the new selling price. Next to the retailer. Of course he
has to make some profit plus the VAT again and then it
would be the new selling price. The retailer now sell this
to the consumer and not being the end consumer,
Malaki na ang price.
When the vat is passed on from the producer to the
distributer one shift lang yan. So when we talk about
the shifting process it is between the seller and buyer
relationship so one shift lng yan. And ung series na sya,
onward na sya.
If it is backward shifting, it is the producer which absorb
the burden. This happen when there is so much
competition in the product.

CAPITALIZATION
It is peculiar only to particular circumstances noh. It is a
form of backward shifting whereby future taxes or
property sold are capitalize at the time of purchase and
deducted in lump some form the selling price. The
capitalization therefore involves only in transaction if
the purchase thereof is in form of a real properties. Like
you looking for an area to expand your business and
inconsideration of finding that real property for that
purpose there would be several factors which the buyer
would have to consider. Between the buyer and seller,
the buyer was able to purchase it only on 35 M so from
50M. The buyer has 50 M. so from 50 M he was able to
buy it at 35. Meron syan 15 M na savings. What
happens to 15 M? that is what he will capitalize. It is a
form of a backward shifting whereby future taxes of the
property sold are capitalize at the time of purchase and
deducted in lump some from the selling price. Ung 15 M
na saving nya will be used to capitalize to answer to
future taxes to which the new owner now will be
confronted as he becomes the owner of the property.
Ung 15 M mabayad ng future taxes ng property.
TRANSFORMATION
Ito ung transformer. The transformation is peculiar to
those in production or manufacturing process. You are
producing sardines or other consumer products
sabon, which are highly competitive products. This is
effective through the process of production. The
transformation is done by producing product at a lesser
cost by improving the method of production. How? Like
in research development department, they invest in this
to buy new machines and equipment to produce more
at a lesser expense. Locking for alternative, etc. By
reason of that, the producer faces the tax, pati ang tax
ina-absrob na nya. The tax here is transferred into
gain(?) through the medium of production.
AVOIDANCE
Usually what is asked in the bar is the distinction
between tax evasion and tax avoidance.
Tax evasion is the resort to illegal or unlawful means in
order to lessen with the payment of taxes or tax lodging
punished by law. Tax avoidance on the other hand is the
use of legally method to reduce tax liability also called
as tax __. Like in choosing over a donation over deed of
sale.
Tax exemption - It is a grant of immunity to tax. we will
discuss it next meeting.
July 10, 2013
Lets continue our discussion on the principles on tax
exemption.
The tax exemption as we mentioned is one of those
forms of escape resorted to for purposes of reducing or
perhaps avoiding tax liability.
When the power to tax is granted whether inherently or
by a constitutional or legislative grant because in the
case of LGUs that power to tax may be given
legislatively through the law-making body or the
Constitution, remember, that once the power to tax is
granted it would always carry with it inherent in that
grant is to grant tax exemption. When the power to
tax is given, the power to exempt would always be
there. The principles therefore that we apply in the
power to tax are the same principles that we also apply
in giving or granting tax exemption. So the tax
exemption also adhere to the principles of the inherent
as well as constitutional limitations - such that the
exemption must conform with public purpose, should
be legislative in nature, must conform to territoriality,
must conform to the principle of international comity -
these would apply because of the power to exempt is
not for public purpose but for private purpose then that
violates an inherent limitation. In the same way also in
the context of the constitutional limitations, the power
to exempt should also conform to the requirement of
due process, equal protection, equality and rule on
uniformity. So the exemption while it is a grant of
immunity to particular persons, group of persons or a
class from the tax which persons or properties or
property rights are generally would be taxable. The
State now instead of generating revenue, the State now
would grant immunity or tax exemption. Rationale of
granting tax exemption: Principle of public policy/ public
benefit/ public interest because in lieu of generating
revenue the State or the government is willing to
shoulder the monetary loss by reason of the exemption
for as long as there would be public benefit or public
interest that will provide by reason of the exemption.
The exemption must be grounded on public policy and
will support public interest will be best served by giving
it. When the State gives an exemption it notes that
there would be loss of revenue but the government is
willing to sacrifice the loss for as long as there would be
a public benefit or public interest that would be served
by reason of that exemption.
The tax exemption may be granted from the State
through the act of Congress or by the national
government or it will be granted through the LGUs. Now
remember that in our structure since the power to tax is
given by the Constitution insofar as LGUs are concerned
then that power can also get the granting also of tax
exemption. In other words, the tax exemption is also
constitutionally granted. The principles therefore that
we study in the States power of taxation are the same
principles that will apply when we grant tax exemption.
Now, the tax exemption may be based on contract,
contained in a charter or the law creating the
corporation or entity to which the exemption is
granted. As a rule, tax exemptions should be based on
principles of public policy and that there must be a basis
for the giving or the granting if tax exemption. In the
context of the non-impairment clause, there are
contracts which are not protected by the clause. When
we connect non-impairment clause with tax
exemptions, not all are protected by the clause. We
would ask what are therefore the exclusions that are
protected by the non-impairment clause? These are
what we call contractual tax exemptions. When the tax
exemptions are those what we call as the contractual
tax exemption by reason that it was granted by the
state, remember the case of Cassanova vs Hord,, where
the State granted tax exemption to the person who was
allowed/authorized to exploit the natural resources and
because he engaged in that activity in exchange of that
he was given tax exemption. If later on a law now there
will be enacted taxing now that activity, the tax payer in
so far that he was given tax exemption will now be
protected by the non- impairment clause because that
exemption was given in the nature of a contractual tax
exemption. Another is when the government would like
to promote of encourage the people to invest on
government securities, yung mga government bonds.
The feature of that is that the interest income earned
will be given tax exemption. Later a law now is enacted
that the interest income from government bonds/
surety will be subject to tax. Will that new law affect
and cover now and repeal the tax exemption given to
that government security which was given earlier a tax
exemption? The answer is that it cannot. It is protected
by the non- impairment clause. The tax exemption in
other words will prevail because you will be protected
by the non- impairment clause. However, if that tax
exemption is not affected by the non- impairment
clause, like in the case of franchise that is engaged in
public utility, in the course of the operation of the
public utility either he will be given an exemption or he
will be given a lesser tax rate. If later on the Congress
will increase the tax rate or will now impose a tax, can
that franchise grantee invoke the non- impairment
clause? The answer is no. it is because in the
Constitution, there is a provision that franchises are no
prohibited by the non- impairment clause. They are
subject to amendments or modification in pursuit of
public interest and public purpose. So the exemption
given is not in the nature of a contractual obligation. In
the case of Meralco v City of San Pablo, the Laguna
area, including San Pablo, was part of the franchise area
of Meralco. Meralco, under its franchise, was subject to
pay for a franchise tax for a certain percentage based
on proceeds. That franchise tax, based on the
percentage of their gross sales, will be the tax to be paid
in lieu of other taxes. In 1991, the LGC was enacted
imposing now a local franchise tax allowed to be
imposed by cities and provinces. The city of San Pablo
and the Province of Laguna assessed the Meralco for a
local franchise tax under the local government code.
Meralco opposed the assessment saying that they were
already liable for a legislative franchise tax by virtue of
the Congressional grant given to them to operate as
public utility provider, that under that franchise grant
they were already made to pay for a franchise tax in lieu
of paying other taxes. So when the Local Government
now will assess Meralco of a local franchise tax they are
not anymore liable, invoking also the non- impairment
clause. The SC said, NO. Meralco is still liable despite
the fact that they are liable to the national franchise tax
for which it is granted by Congress, Meralco is still liable
for a local franchise tax under the Local Government
Code because it is not protected by the non-
impairment clause. Can you connect this with double
taxation? Is there double taxation? There is none
because you have two taxing authorities, while it is also
a franchise tax, one is imposed by the National
Government and the other is imposed by the Local
Government. What we are saying here is that, tax
exemptions are generally reasonable tax. So the tax
exemption is given by reason of a charter or a law
creating that entity or corporation which was granted
the tax exemption.
Another principle on tax exemption is EQUITY. Can a tax
payer invoke equity for tax exemption? For example, A
is now exempted from tax so his neighbor now is
invoking equity that on the basis of equal protection I
should also get a similar exemption. Can you invoke
that? The answer is NO. You cannot invoke equity as a
ground for tax exemption. The neighbor cannot invoke
similar exemption on the ground of equity and equal
protection. Remember that we have studied that
singling out subjects or objects of taxation whether for
taxation or exemption does not violate equal protection
as long as it will comply with the requisites of a valid
and reasonable classification. So when you tax or
exemption group of persons, all these must comply with
the requisites of a valid and reasonable classification,
that when you exempt or tax, there must be a
substantial distinction which makes a real legal
necessity. So the requisites must also be complied for
the purposes that it will conform to the requirements of
equality and uniformity.
Now, going back on that rule on equity, in one case of
Florocement v Gorospe, florcement was given the
authority to engage in mining and the raw materials
that they generate from mining, the raw materials were
used to produce cement. Now, the mining activity was
given tax exemption. So, in the manufacturing activity
and production of cement, the government assessed
florocement for an excise tax on the manufacture of
cement. Florocement protested the assessment
invoking equity as a ground for tax exemption because
the mining activity is a tax exempt. The raw materials
emitted from that exempted activity are used as
materials for the production of the cements. Walang
nagbago. Ang raw materials na ginamit sa production ng
cement ay galing dun sa exempted activity, thus the
production of cement should also be tax exempt
because it came from those raw materials. The SC said
NO. It is because the exemption that was given to you
refers only to the mining activity and not on the
manufacturing of cements. The mining activity is
different from your production of cement. So you
cannot invoke equity as a ground for tax exemption.
Now, moving further, in your readings you have come
across how tax exemptions are to be construed. Tax
exemptions are to be construed strictly or construed
not against the government but against the one who
asserts exemption. What does that mean? It means that
the tax payer has the burden or the burden is
incumbent upon the tax payer to prove that the
exemption is granted to him. You cannot invoke
inference, you cannot invoke validation. The law on the
statute must provide the exemption that your activity is
given an exemption otherwise if there is no law granting
it then you cannot invoke exemption because tax
exemptions statutes are given strict construction.
Tax exemptions are matters of personal privilege. It is
not transferrable. That is also the reason why you
cannot invoke also because tax exemptions are personal
privilege given to the grantee. It cannot be transferred
or assigned without Congressional or Legislative
consent. Tax exemptions are generally revocable unless
founded on contracts which is protected by the non-
impairment clause.
As to kinds of tax exemptions or classifications of tax
exemptions.
As to manner of creation, tax exemptions may be
express or implied. Meaning there is an affirmative
exemption if it is express or exemption by omission if it
is only implied exemption. Meanings, if this people are
taxable in this classification, meaning those people
outside that classification, are exempted from paying
that tax. So there is exemption by omission.
As to its subject, it maybe personal tax exemption or an
impersonal exemption. Meaning, if it is directed in favor
of 7 persons, then it is a personal exemption. But if it is
directed to certain group or class then it is an
impersonal exemption.
As to scope or extent, you have a total or a partial
exemption. Generally, the exemption will be applicable
to tax payers who are subject to direct taxes. In other
words, the exemptions will always refer to direct tax
exemptions. You cannot invoke tax exemptions on
indirect taxes. So when we talk about total tax
exemptions, it means that a non- stock, non- profit
institutions. They are practically given full exemption or
total exemption to support them by exempting from
taxes. When you talk about partial tax exemptions, you
are given exemptions to a certain type of tax. Like the
property tax exemptions on property used in religious
and charitable purposes. Of course, this refers only to
property tax exemptions, thus, partial exemption. Is
there an absolute tax exemption? Meaning you are
given exemption both on direct and indirect taxes. Now,
in the old case of NPC, where the SC allowed practically
an absolute tax exemption, in the case of Maceda v
Macaraig 197 SCRA 711. This is a taxpayer class suit,
filed by Senator Maceda, questioning the exemption to
NAPOCOR under PD 938. PD 938 grants exemption to
then NAPOCOR from all forms of taxes, whether
national or local, whether direct or indirect. This tax
exemption granted to NAPOCOR was sustained by the
SC, which practically grants absolute exemption to the
NAPOCOR. The exemption granted under PD 938 covers
all forms of taxes, whether national or local, whether
direct or indirect taxes. It is because generally, when
you are tax exempt, you are exempted only on direct
taxes, you could not claim exemption on indirect taxes.
Thus, this case is the exemption on the general rule.
Now, you have the sources of taxation exemptions.
1. Constitution- such weve discussed on the
limitations of taxations.
2. NIRC (Tax Code)
3. Tariff and Customs Code
4. Special laws
5. Tax Treaties-- like that in the ruling made by the
US Supreme Court on Same- sex marriage in
striking the DOMA or the Domestic Marriage
Act or the Defense of Marriage Act, the case of
US v Hudson, the gay women entered into a
same sex marriage in Canada. They transferred
in New York. Spouse of Edith Hudson died.
Under the Federal Estate Tax Law, the surviving
spouse is entitled to tax exemption from the
estate of the deceased. Under the Federal Law
on DOMA, the spouse referred to is the
opposite sex. Like if the husband dies, the
surviving spouse is entitled or if the wife dies
the surviving husband is entitled. Now how
about this gay spouses, like in the case of Edith
Hudson? This was recognized by the State of
New York because by reason of comity,
meaning that the principles of international law
is part of the law of the land. The State denied
the exemption because she was not the spouse
defined by the DOMA. The IRS denied. This
went to US SC, invoking now that since the state
now recognizes same sex marriage, the federal
law therefore should not violate their marriage.
You have a state law that recognizes same sex
marriage but your federal law does not, thus a
violation of equal protection. So, now the US SC
now invalidates the DOMA and grant the
recognition of a surviving spouse exemption. If
not, it will violate the equal protection and due
process. Such it says, no person shall be
deprived of its life, property or liberty.. there is
no mention there as to the gender of the
person even in our own Constitution. when
the DOMA refer to marriages between a man
and a woman, then it would be a violation of
the equal protection. It is interesting how our
SC might look at it. So now, the husband and
wife or even same sex partners may now claim
exemptions. It is interesting how our SC would
look at it, for example as to same sex marriage,
like foreigners working in multinational
company, who are married from a country
 which recognizes same sex marriage. Then
theyre assigned in the Philippines and someone
dies, how will the exemption apply? This is
interesting.
6. Local tax ordinances promulgated and enacted
by LGUs.
For purposes of construction, we have, exemptions are
construed STRICTLY. Taxation is the rule and exemption
is the exception.
Then you have CLASSIFICATION STATUES. Classification
tax statutes are those laws which specify those subject
and not subject to tax. Now, are classification statutes,
tax exemption statutes? They are not. Classification tax
statutes are not tax exemption statutes. When tax law
makes a classification, like ito yung taxable, ito yung
hindi, they are not tax exemption statutes. Thus, we do
not apply strict statutory construction, we apply liberal
construction on classification statutes.
Then also, we have this principle of TAX AMNESTY. Tax
amnesty, like tax exemption, is construed strictly. It is
because tax amnesty is the condonation of your tax
liabilities. In this case of Republic v IAC (196 SCRA 335),
a law granted tax amnesty. The tax payer availed the tax
amnesty. Now, complying and paying the tax under the
tax amnesty law, the BIR still ran after the PR for
deficiency of the paid tax. So the question here is, can
the government still run after the tax payer after he has
availed of the tax amnesty? In the same way that when
the government pardons, can the government still run
after you? In the same way as tax amnesty, the
government can no longer run against you for
deficiency taxes when you have already availed of the
tax amnesty. What is therefore the nature of a tax
amnesty? A tax amnesty operates as a general pardon
or the intentional overlooking of the government of its
authority to impose penalties on persons otherwise
guilty of tax evasion or violation of the revenue or tax
law. Tax amnesty partakes of an absolute forgiveness or
waiver by the government of its right to collect what is
due it and to give tax evaders who wish to relent a
chance to start with a clean slate. Tax amnesty, like tax
exemption, is not presumed in law nor never favored.
Tax amnesty is actually a way of the government to
generate revenue. Kasi meron yung iba na takot
magbayad ng tax kasi sa penalty na nag- ipon2x na. So
that now, they will come out into open, the government
now, through an act of Congress, enacts a tax amnesty
law. So generally, what you pay now is the basic tax to
the extent na ang dapat bayaran na due is 1M, pwede
na 50% nalang ang bayaran dahil the government
waives the penalties. This is not often. It is dependent
upon the government like during the time of Erap and
Cory, to generate more fund. It legally operates as a
condonation since you are only made to pay the basic
tax and the rest of the penalties or charges kay wala na,
thus the government cannot run after you for the
deficiency. TAX AMNESTY construed strictly.
---quiz na after----
Taxation I
July 16, 2013, 8-9 PM
Transcribed by: Mae Bungabong
G. Nature, Construction, Application of Tax Laws
As to the nature of our tax laws, tax laws are civil in
nature even if the taxing jurisdiction is occupied by the
enemy our tax laws will continue to be enforced
because they are civil in nature. So they are not in other
words political nor penal nor criminal in nature so in
your readings you have encountered that the Bill of
Attainder or the Ex Post Facto Law are not applicable in
so far as in connection of the nature of our tax laws.
Now lets go to the interpretation of tax laws. Now
construction refers to the manner within which tax laws
are being construed and we have set of rules which we
apply for the purposes of construing the tax provisions
or tax statutes.
1. Would be with regards to the legislative intent-
Now tax laws are to receive reasonable
construction with the view of carrying out their
purpose and intent. So one aspect in
determining the intention of the framers of the
law. In connection with a particular statute.
Because the construction does not apply only,
the rules on construction does not apply only,
 exclusively to tax laws. This rule can be applied
to other legislations or other statutes. Even in
your political law you also have the use of
legislative intent and one way to determine
legislative intent is not only going over the
provisions of the law but also going over the
debates, the minutes, going over the arguments
that were done in the course of Congress or in
the law-making body. So the minutes, the
deliberations , the debates these records are
kept in the law-making body or by the Congress
so you can go back if you, these debates, these
arguments made by the legislators on what was
their intention in coming up with that provision.
So like for example in a tax law well they use or
they refers tax payers as persons so when we
deal with persons so do we, what was the
legislative intent? Does that refer only refer to
natural persons? And when we talk about
persons in its generic sense and what was the
intention of the Congress and in our study you
will discover that when we talk about persons-
not only the natural, it also speak about the
juridical persons. But in our jurisdiction, in so
far as taxes, the taxpayers are not only the
natural persons or individuals but we also have
juridical persons like corporation and you have
partnerships so these are the tax persons that
are refer to so far as a particular provision in a
statute. So now we go to one aspect of the rule
of construction by way of determining the
legislative intent.
2. Now second rule is what if theres doubt as to
the meaning and construction, then in case of
doubt tax laws are to be construed liberally in
favour of the tax payer. The reason why we
apply liberal construction in case of doubt is
that taxes are burdens so we, the law even the
courts that in construing our laws are, it is
stated more on the part of the tax payers and
construed strictly against the government so
they are construed liberally in favour of the tax
payers because taxes are burden.
3. Then you have the rule that when the language
is plain and clear of the tax law so we take the
literal meaning of that statute. The rule on
construction as against the government would
not be applicable for the language of the tax
law or the tax statute is plain and there is no
doubt as to its legislative intent.
4. Now we only apply strict construction when we
deal with tax exemptions or to the tax laws
granting tax exemptions we apply the strict
construction. Meaning it is strictly construed
against a tax payer and liberally in favour of the
government. However if you remember there is
an exception to the strict construction meaning
we apply a liberal construction when it involves
exemption in favour of religious, charitable, and
educational purposes or when it is the
legislative intent we apply by way of exception
the liberal construction in the case of tax
exemptions. But as a rule we apply the strict
construction in connection with tax exemptions.
Then we have the application. Now we have taken this
up when we discuss about due process. And one of the
illustrations of what due process has to be applied in
the exercise of the power of taxation is that tax laws
should be applied PROSPECTIVELY. Tax laws -we dont
apply them retroactively in so far as tax laws. So
generally, we apply prospective application since the
nature and amount thereof tax could not be foreseen
and understood by the tax payers at the time of the
transaction which the law seeks to tax was completed.
So at the time of its enforcement we usually apply the
prospective application. The retroactivity is only applied
by way of exception and we apply retroactivity so
theres a retroactive operation: 1. There is that
legislative intent or 2. When retroactivity is not harsh
and oppressive as illustrated in that case of Castro vs.
Collector- in the case of the war profits tax law where it
allowed retroactivity because the law was not harsh and
oppressive. The other one by way of exception is
legislative intent. Meaning the law provides a
retroactive application. This is illustrated in the case of
Umali vs. Estaneslao and Gorospe vs. CIR (29 SCRA
446). Now briefly the issue involved in these two cases
was the application of the personal exemptions. Now
under our income tax provision, individual tax payers
are granted what we call personal exemptions to
answer the cost of living. Now the cost of living because
we have to give, you have to pay rent etc. you have to
pay for your family driver, your domestic expenses of
which when you are engaged in business or you are
practicing a profession you cant be charged of this
since there is no connection with your business or
occupation unless the driver whom you hired is the
driver who drives you in the conduct of your profession
or your business or occupation but if it is for your
personal comfort or the familys comfort like domestic
help these expenses could not be charged as a
deduction to the income of that individual taxpayer. So
the regular or daily expenses are not chargeable against
income the law sets a limit which we call it personal and
traditional exemptions. Additional exemptions if you
have qualifying dependents for the tax payer who
engages in business or practice of occupation the cost
of living is chargeable to that account we call personal
exemption. Now, what happened here in this case is
that lets say in 2001 the personal exemption granted
lets say Php25, 000.00. Now during that year that
personal exemption was amended increasing it lets say
Php30, 000.00. Let us say that the Congress in 2001
increased the tax exemption to Php30, 000.00. Now
after publication etc. Sometime in February 2002, the
Php30, 000.00 personal became effective. For tax year
2001, the deadline for filing the income tax return is on
or before April 15, 2002 so when you talk about tax year
2001 the filing of the annual ITR, you are given up to
April 15, 2002 to file the Income Tax Return. And as an
individual tax payer you are entitled to some personal
exemption, so what personal exemption are you
entitled to? When you file Income Tax Return on or
before April 15, 2002. So will it be the Php25, 000.00 or
the new exemption at Php30, 000.00? So ito yung case
that went up to Supreme Court. Does the tax payer
entitled to claim the new exemption under the new law
when the return that he was filing cover a tax period
within which the lower exemption was then enforced so
this issue was brought up to the SC. According to the
Supreme Court, the tax payer is allowed to avail the
higher exemption even if the tax period covering that
return covered the previous tax year because at the
time the filing of the return the new exemption became
effective but the argument here is that, isnt that tax
laws are prospective? Since this covered tax year 2001
then the exemption in 2001 shall be applicable. Now
the new Php30, 000.00 exemption could not be applied
retroactively in 2001 because tax laws are prospective,
this Php30, 000.00 exemption should be applicable to
the returns that will be due for 2002. So when the en
banc gather the law, the deliberations in Congress they
found out that it was the legislative intent that it will
have a retroactive effect so under that case of Umali vs.
Estaneslao and Gorospe vs. CIR, the Supreme Court
decided that taxpayers are allowed to claim the new
exemption because of legislative intent. The law allows
by way of legislative intent to give the higher exemption
of the new personal tax exemption again that is only by
way of exception. It is still the prospective application
that will follow. Unless the law or the retroactively and
it is not harsh and oppressive.
Then we have the provisions on mandatory and
directory provisions of tax laws. Now we still go back to
that principle that taxes are burdens. And the taxes are
the lifeblood of the government and the government
would like that the taxes are to be collected on time.
Then tax payers would comply to their obligations also
on time. So our tax laws will have mandatory and
directory provisions. Now MANDATORY PROVISIONS-
are intended for the security of the citizens or which are
designed to ensure equality or certainty as to the
nature and amount of each persons tax while
DIRECTORY PROVISIONS are designed merely for the
information or direction of officers or to secure a
methodical systematic moves for proceedings. Now
what is the importance of having these mandatory and
directory provisions? Now omission to follow
mandatory provision renders the act or proceeding
invalid to which it relates while failure or omission to
follow directory provision will not have a similar
consequence. So walang kaso kung di mo sundin kung
directory ang provision. But there will be a possible
consequence when you failed to follow mandatory
provisions like deadline typical in our tax to have
deadline within which we have to pay our tax. If you fail
it to pay on time then there will be penalty, surcharges
and the like as a consequence for failure to follow
mandatory provisions so like for example deadlines. You
also have period to appeal when a taxpayer is sent an
assessment on a finding of a deficiency tax, he is given
30-days to protest the assessment so what will happen
if he fails to protest? Then that assessment will become
final then collection proceeding will follow to collect the
deficiency tax so thats the consequence if you fail to
protest. So when you fail to protest, you failed to
appeal on time, so the period to appeal you will be now
caught in default and whatever assessment you
received, it will become final and executory. So these
are what we call mandatory provisions. So what are
directory? Directory provisions are merely for
convenience and for a systematic and a methodical
move in the conduct of the proceedings like the
payment of taxes. We used to pay taxes to BIR but that
would be too burdensome because mahaba ang pila. S
payment of taxes would be done through banking
system. So banks are accredited by BIR so you dont
have to go to BIR to pay your taxes. So now you just
have to go to accredited banks to made payment for
your taxes. The other is you have the electronic filing so
there is an electronic filing of your taxes and the
payment of the tax so you have to enrol to the
electronic filing system you make the crediting to your
bank to have that remitted to BIR so you dont have to
go to the banks and made payments because you can
just do it through online. So these are new features
under our system on paying taxes so these are directory
provisions.
Then you have the matter on the sources of tax laws.
Our tax laws like tax exemptions, you can find them in
the Constitution, in the legislation, in the laws, the
statutes enacted by Congress. From regulations, rulings,
opinions rendered by our tax authorities, judicial
decisions and you also have tax treaties.
Now you have the Constitution the power to grant
taxation even to the local government units. The power
to grant tax exemptions even to non-stock, non-profit
educational institutions and to the property tax
exemptions to real properties which are used for
charitable, educational, or religious purposes. So these
are the sources of tax laws in the Constitution.
From legislation you have NIRC, you also have the Local
Government Code, you have the Tariff and Customs
Code for taxes of importation and exportation, you also
have the law creating the Court of Tax Appeals so far as
the procedural aspect of our tax laws, the substantive is
addresses by our NIRC, by the Tariff and Customs Code
and the procedural aspect is addressed by the creation
of the Court of Tax Appeals.
You have these regulations, rulings and opinions. Now
in our jurisdiction the collective arm of the government
in charged in the collection of tax is the Department of
Finance and under the DOF, you have these two
agencies of government in charge of collection you have
the BIR- Internal revenue taxes and Bureau of Customs-
in the case for the tariff and customs duties on the
importation and exportation. So these are the two
major government agencies in charge in the collection
of taxes and they are executive so the and the it is the
thru the Secretary who promulgates regulations for the
effective enforcement of our tax laws. Now the Internal
Revenue Code is the codification of our tax laws and
every now and then there is a new tax law enacted by
Congress as the amendment on provisions of the NIRC,
the DOF upon the recommendation of BIR will
promulgate the necessary rules and regulations for the
enforcement of the law so you call these revenue
regulations. In Customs you call this Customs
Administrative Orders for these are regulations enacted
for upon the recommendation of the Commissioner of
Customs to the DOF for the enactment and
promulgation of regulations under the Tariff and
Customs Code so in the case of regulations therefor, the
regulations are inferior to the statute. The regulations
cannot alter, add or even subtract to the provisions of
the statute so in the case of conflict between the
regulation and the statute, the statute will prevail, the
regulation will become void if it will go beyond the
provision of the statute. If the law does not provide for
a penalty then a regulation is prohibited to impose one
because the law there is superior than the regulation.
Now our regulations are enacted and they are
necessary for the proper enforcement and execution of
our tax laws. They are intended to clarify, to explain the
law and to carry its effect the general provisions by
providing details of administration and procedure.
Remember go back to the study of principles when the
agencies of the government enforced the law and when
they promulgate rules and regulations they are not
enacting a tax statute they are simply implementing the
tax statute or tax law because these regulations are
intended for the convenience of tax payers and for the
purposes of validity, regulations must not be contrary to
law and the Constitution; second requirement, there
must be publication either in the Official Gazette or
newspaper of general circulation so requirement of
publication.
Now we have rulings and opinions. Now rulings and
opinions to a certain extent will also have its own force
and effect as a law. Now when a tax payer is confronted
with a tax problem the law allows him to make a query
to the BIR or BOC depending kung ano yung kanyang tax
query. Now usually, he writes to the Commissioner of
BIR or BOC that he is confronted with a tax issue and
ask for a ruling or opinion whether it is taxable or he is
exempt for that transaction so the Commissioner makes
a reply on the basis of the facts presented to him that
the transaction he was going to enter to is taxable or
the Commissioner may make a ruling or an opinion that
the transaction he will enter to will not be taxable. So
that will partake and will have a force and effect of the
law rulings and opinions however, rulings and opinions
will be as good depending on the facts presented by the
tax payer because there will always be a caveat at the
end of the ruling of commissioner that the ruling will
stand so far as facts presented but if the facts will
change then the Commissioner will make a reservation
that the ruling may change. The rulings and opinions
will stand valid as the facts and the circumstances
presented by the tax payer on a certain tax query. Now
in practice like you have Section 40 of the NIRC is
provision on a NO gain or loss transaction an example of
that is when you could create a corporation now
instead of putting cash you would put in real property in
exchange of shares of stocks or you want to invest in
that corporation so instead of putting cash you put in
real properties and in exchange of that bibigyan ka ng
shares of stocks so under Section 40 such exchange of
real properties for shares of stock is a no gain or loss
transaction ibig sabihin hindi siya taxable na
transaction. Now ordinarily if you pay with a real
property regardless of consideration whether the
consideration was in cash, in a barter or in a manner of
exchange that transaction is subject to capital gains tax
so to avoid the impact of the capital gains tax for reason
that under Section 40 that exchange is tax free you
write to the BIR and ask for ruling that you will be
buying some shares in that corporation and instead of
paying cash you will pay real property in exchange of
the shares of tax. So the Commissioner will now make a
reply and of course in your letter you will invoke the
exemption under Section 40 because the exemption is
not self-executory hindi siya automatic kailiangan muna
ng ruling so when the BIR now will reply by the reason
of the facts presented then the transaction that you will
enter into will be tax free under Section 40 so with that
ruling you can now enter into that exchange so you will
file a return, the capital gains tax return and attached to
the return the ruling because your local BIR will not
accept the argument maski yung bring in there the NIRC
before the Revenue Collector and sasabihin mo under
Section 40 and I am a third year law student, under
Section 40, your local BIR will not believe you because
they will rely to the ruling even if the rule is there it is
not automatic so when you file your capital gains tax
return you attached the Commissioners ruling sa
makita na ng local BIR that you are exempted so hindi
ka na magbayad eh kung walang ruling magbabayad ka
talaga kasi nga hindi naman yan automatic. You will be
issued now a tax clearance and the certificate of
authority to register the transfer now you will go now to
ROD dala dala with the ruling, the tax clearance that
you are exempted from that transaction. So thats what
we do in practice of tax exemption in so far as to the
application. So you have these rulings and opinions.
Then you have judicial decisions so judicial decisions of
course when you talk about judicial decision these are
rulings made by our courts. Now the courts that do or
address tax problems you have the Court of Tax Appeals
then the Supreme Court so decisions and rulings made
by these courts will also have the force and effect of a
law. Now in NIRC, tax cases under NIRC-so you have
that CIR (Commissioner of Internal Revenue) who is the
head of BIR so all proceedings will start as an
administrative process and when you have cases
involving protesting assessments under our tax system
taxes under the NIRC are called self-assessing taxes so
when we call them self-assessing taxes it is the taxpayer
himself who determines the tax liability we dont
usually go to the BIR and ask the examiner the revenue
district officer magkano ba yung tax na babayaran ko?
Because our taxes under NIRC are self-assessing so it is
started to the filing of tax return so dyan nagsisimula.
We file tax returns and pay the tax on the basis of the
returns kaya nga self-assessing kasi ikae yung
nagdedetermine kung magkano ang tax na babayaran
mo. Whether it is in the form of income tax, estate,
donors, VAT etc. so you will pay your tax based on the
returns. So after you file your returns, these returns will
be subjected to what we call assessment. The
assessment is the process of audit, investigation, and
examination of your tax returns including your financial
statements etc. to find out whether the amounts in
your tax returns are accurate. So your return is
subjected to what we call assessment. After assessment
you will be notified, there will be a notice of the findings
made by the revenue examiner so you will be notified
so there will be what we call notice of assessment. So
when the taxpayer now receives an assessment that the
BIR has found a tax deficiency your remedy unless you
will just pay the liability there you will just pay the
deficiency tax but if you do not agree with the findings
you will file a protest on the assessment, you bring that
protest to the CIR, the CIR will make a decision on your
protest whether he will grant or deny your protest. So
when the Commissioner will grant your protest eh di
tapos kasi the Commissioner agreed to you in rebutting
the findings like for example the BIR will say that you
will be paying 1 million pero ang sabi ni tax payer no
and he protested that assessment and presented that
his deficiency is 100,000.00 lang so the Commissioner
granted that protest. Now in case of denial the remedy
of the tax payer is to appeal to the Court of Tax Appeals.
Now in the CTA, it is appealed first before the division
then it is brought to the CTA en banc. Then finally to the
Supreme Court. So thats the process in any tax
deficiency will govern. So the deficiency will start from
the returns that you have filed in the course of the
assessment so you have decisions along the way. The
decisions of the Commissioner which is administrative
from an administrative it will be now converted into a
judicial action where you now appeal to the CTA
actually this is a lengthy discussion but this one is a
simple presentation because there is still the period 180
days basically when the CIR would deny your protest
your remedy is to appeal before the CTA to the division
then even if talo ang gobyerno the government would
still appeal before the CTA en banc then from there to
the Supreme Court. The other case is the claims for
refund ganun din yung process. In filing for a tax refund,
you will file that before the CIR then from the CIR if it is
denied then you will go to CTA by division then CTA en
banc then to the Supreme Court. But again it is pursued
administratively at first just make an appreciation kung
saan ba ito galing itong mga judicial decisions na
sinasabi dito. From the CTA decided by the division,
from the CTA decided en banc and then finally by the
SC.
When we go to the Tariff and Customs Code, the Tariff
and Customs Code naman well you have assessments of
the collector of the imports and customs duties the
protest is filed before the collector of customs. From
the collector you have the Commissioner of Customs
(COC) from the COC it is converted into a judicial action
to the CTA division then CTA en banc then the Supreme
Court. Ganun din yung process when you deal with
forfeiture proceedings. In the forfeiture proceedings
like yung seizure and forfeiture proceedings like yung
there is an illegal importation of an article or articles are
brought in our country unlawfully so these articles will
be seized and will be subjected to forfeiture
proceedings the seizure and forfeiture proceedings will
be initiated before the collector of customs when
articles are brought unlawfully or acts involving
smuggling or articles are brought in fraudulently,
misdelacaration or under declaration so these articles
will be seized including the mode of transport-yung
barko, eroplano, or land transportations. Yung mga
taxable articles or ito yung mga contrabands so they will
be seized. So judicial decisions from this will also
emanaes from the CTA and the Supreme Court.
Then you have tax treaties again tax treaties are
executive agreement we dont require the
Congressional or Senate ratification when we talk about
tax treaties these are mere executive agreements which
the President or the Secretary of Finance as the alter
ego to enter into treaties with other countries. So tax
treaties entered into by way of reciprocity, again the
purpose is to reduce the multiple impacts of situs of
taxation.
So we have this one aspect of the nature of tax laws
that tax laws are special laws they are not in a nature of
general laws. Ano ba yung mga general laws? Civil Code
it is a general law so when theres a conflict between
the provisions of special laws and general laws, which
will prevail? Tax laws as special laws shall prevail over
the general law. So when a tax law is enacted then for
the purposes of effectivity this will require publication
but the law does not require under the tax law the
manner of publication in most of the laws we always
see that the Congress will specify it will be published in
the OG or in a news paper of general publication. So the
law did not provide the manner of publication so the
law was published in the OG which is the requirement
under the Civil Code but tax laws are to be published in
the Official Gazette (OG) so that will also render the tax
law even if a special laws effective because having
satisfied the requirement of publication. Even if the law
does not provide where it would be published. So what
if it is published in a newspaper of general circulation?
Will the law now be invalid? Because under the general
law the publication should be on the OG so this might
be a problem in the future. Usually our tax laws and
other laws revenue or nonrevenue provide manner of
publication either they provide in the newspaper of
general circulation or in OG and newspaper of general
circulation.