Notes to Taxation I

Part II
SITUS OF TAXATION (Place of taxation)
RULE: The State where the subject to be taxed has a situs may rightfully levy and
collect the tax
EXCEPTIONS TO THE TERRITORIALITY RULE
A) Where the tax laws operate outside territorial
jurisdiction
1) TAXATION of resident citizens on their
incomes derived
from abroad
B) Where tax laws do not operate within the
territorial jurisdiction of the State
1) When exempted by treaty obligations

In determining the situs of taxation, you have to consider the nature of the taxes
Example:

1) POLL TAX, CAPITATION TAX, COMMUNITY TAX - Residence of the taxpayer

2) REAL PROPERTY TAX OR PROPERTY TAX - Location of the property
- We can only impose property tax on the properties of a person whose residence is in
the Philippines.

SITUS OF TAX ON REAL PROPERTY

LEX REI SITUS or where the property is located
REASON: The place where the real property is located gives protection to the real
property, hence
the property or its owner should support the government of that place
SITUS OF PROPERTY TAX ON PERSONAL PROPERTY
MOBILIA SEQUNTUR PERSONA - movables follow the owner;
movables follow the domicile of the owner

RULES:
1) TANGIBLE PERSONAL PROPERTY
Where located, usually the owners domicile
2) INTANGIBLLE PERSONAL PROPERTY
General Rule: Domicile of the owner
EXCEPTION: The situs location not domicile
Where the intangible personal property has acquired a business situs in another
jurisdiction
* The principle of “Mobilia Sequntur Personam” is only for purposes of convenience.
It must yield to the actual situs of such property.
Personal intangible properties which acquires business situs here in the Philippines
1) Franchise which is exercised within the Philippines
2) Shares, obligations, bonds issued by a domestic corporation
3) Shares, obligations, bonds issued by a foreign corporation, 85% of its business is conducted in
the Philippines
4) Shares, obligations, bonds issued by a foreign corporation which shares of stock or bonds
acquire situs here
5) Rights, interest in a partnership, business or industry established in the Philippines
- These intangible properties acquire business situs here in the Philippines, you cannot
apply the principle of “Mobilia Sequntur Personam” because the properties have
SITUS OF INCOME acquired
TAX situs here.
A) DOMICILLARY THEORY
- The location where the income earner resides is the situs of taxation
B) NATIONALITY THEORY
- The country where the income earner is a citizen is the situs of taxation
C) SOURCE RULE
- The country which is the source of the income or where the activity that produced the income
took place is
the situs of taxation.
SITUS OF SALE OF PERSONAL PROPERTY - The place where the sale is consummated and
perfected

SITUS OF TAX ON INTEREST INCOME - The residence of the borrower who pays the interest
irrespective of the place where the obligation was contracted
CIR vs. BOAC
Revenue derived by an off-line international carrier without any flight from the
Philippines, from
ticket sales through its local agent are subject to tax on gross Philippine billings
SITUS OF EXCISE TAX - Where the transaction performed
HOPEWELL vs. COM. OF CUSTOMS
The power to levy an excise upon the performance of an act or the
engaging in an occupation does not depend upon the domicile of the
person subject to the exercise, nor upon the physical location of the
property or in connection with the act or occupation taxed, but depends
upon the place on which the act is performed or occupation engaged in.
Thus, the gauge of taxability does not depend on the location of the
office, but attaches upon the place where the respective transaction is
perfected and consummated
DOUBLE TAXATION- Taxing same property twice when it should be taxed but once.
Taxing the same person twice by the same jurisdiction over the same thing.
- Also known as duplicate taxation
PEPSI COLA vs. CITY OF BUTUAN
There is no constitutional prohibition against double taxation in the Philippines. It is
something not favored but is permissible, provided that the other constitutional requirements is
not thereby violated

KINDS OF DOUBLE TAXATION

1) DIRECT DOUBLE TAXATION
- Double taxation in the objectionable or prohibited sense
- Same property is taxed twice
REQUISITES:
A) The same property is taxed twice when it should only be taxed once;
B) Both taxes are imposed on the same property or subject matter for the
same purpose;
C) Imposed by the same taxing authority;
D) Within the same jurisdiction;
E) During the same period; and
F) Covering the same kind or character of tax

2) INDIRECT DOUBLE TAXATION - Not legally objectionable

If taxes are not of the same kind, or the imposition are imposed for different
taxing authority
and this may involve the same subject matter
EXAMPLES:
A) The taxpayers warehousing business although carried on in relation to the
operation of its
sugar central is a distinct and separate taxable business
B) A license tax may be levied upon a business or occupation although the land
or property
used in connection therewith is subject to property tax
C) Both a license fee and a tax may be imposed on the same business or
occupation for selling
the same article and this is not in violation of the rules against double
taxation
D) When every bottle or container of intoxicating beverages is subject to local
tax and at the
same time the business of selling such product is also subject to liquors
license
E) A tax imposed on both on the occupation of fishing and of the fishpond itself
F) A local ordinance imposes a tax on the storage of copra where it appears that
the finished
products manufactured out of the copra are subject to VAT
MEANS EMPLOYED TO AVOID DOUBLE TAXATION
1) Tax deductions
2) Tax credits
TAX CREDIT - An amount allowed as a deduction of the Philippine Income tax on
account of income
Taxes paid or incurred to foreign countries. It is given to a taxpayer in
order to provide
a relief from too onerous a burden of taxation in case where the same
income is
subject to a foreign income tax and the Philippine Income tax.

WHO CAN CLAIM TAX CREDIT

1) Citizens of the Philippines
2) Domestic corporations

3) Provide for exemption

4) Enter into treatise with other states
5) Allowance on the principle of reciprocity

CITY OF BAGUIO vs. DE LEON

The argument against double taxation may not be invoked where one tax is imposed by the
state and the other imposed by the city, it being widely recognized that there is nothing
inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the
same occupation, calling or activity by both the state and a political subdivision thereof. And
where the statute or ordinance in question applies equally to all persons, firms and corporations
placed in a similar situation, there is no infringement of the rule on equality.

VILLANUEVA vs. CITY OF ILOILO

An ordinance imposing a municipal tax on tenement houses was challenged because the owners
already pay real estate taxes and also income taxes under the NIRC. The Supreme Court held
that there was no double taxation. The same tax may be imposed by the National Government
as well as the local government. There is nothing inherently obnoxious in the exaction of license
fees or taxes with respect to the same occupation, calling or activity by both the state and a
political subdivision thereof. Further, a license tax may be levied upon a business or occupation
although the land used in connection therewith is subject to property tax.

DOCTRINES ON DOUBLE TAXATION

1) Direct Double Taxation (DDT) is not allowed because it amounts to confiscation of property
without due process of law
2) You can question the validity of double taxation if there is a violation of the Equal protection
clause or Equality or Uniformity of Taxation
3) All doubts as to whether double taxation has been imposed should be resolved in favor of the
taxpayer

ESCAPE FROM TAXATION

BASIC FORMS OF ESCAPE FROM TAXATION
1) SHIFTING - Shifting is the transfer of the burden of a tax by the original payer or the one on
whom the tax
was assessed or imposed to someone else
- Process by which such tax burden is transferred from statutory taxpayer to
another without
violating the law
It should be borne in mind that what is transferred is not the payment of the tax, but the
burden of the tax
Only indirect taxes may be shifted; direct taxes cannot be shifted

2) CAPITALIZATION - Reduction is the price of the taxed object equal to the capitalized value of
future taxes on
the property sold
This is a special form of backward shifting, where the burden of future taxes
which the buyer
may have to pay is shifted back to the seller in the form of reduction in the
selling price

3) TRANSFORMATION - The manufacturer in an effort to avoid losing his customers, maintains

the same selling
 price and margin of profit, not by shifting the tax burden to his
customers, but by
improving his method of production and cutting down or other
production cost,
thereby transforming the tax into or earn through the medium of
production.

4) AVOIDANCE - Also known as “tax minimization”

- not punished by law
- Tax avoidance is the exploitation of the taxpayer of legally permissible
alternative tax rates or
methods of assessing taxable property or income in order to avoid or reduce
tax liability

DELPHERS TRADERS CORP vs. IAC (157 SCRA 349)

The Supreme Court upheld the estate planning scheme resorted to by the
Pacheco family in
converting their property to shares of stock in a corporation which they
themselves owned
and controlled. By virtue of the deed of exchange, the Pacheco co-owners
saved on
inheritance taxes. The Supreme Court said the records do not point anything
wrong and
objectionable about this estate planning scheme resorted to. The legal right of
the taxpayer to
decrease the amount of what otherwise could be his taxes or altogether avoid
them by means
which the law permits cannot be doubted.

5) EXEMPTION - It is the grant of immunity to particular persons or corporations or to persons

or corporations
of a particular class from a tax which persons and corporations generally within
the same state
or taxing district are obliged to pay. It is an immunity or privilege; it is freedom
from a financial
charge or burden to which others are subjected.
· Exemption is allowed only if there is a clear provision there for.
· It is not necessarily discriminatory as long as there is a reasonable foundation or
rational basis.
· Exemptions are not presumed, but when public property is involved, exemption is
the rule and
taxation is the exemption.

Rationale for granting tax exemptions

· Its avowed purpose is some public benefit or interests which the lawmaking body
considers sufficient to offset the monetary loss entailed in the grant of the exemption.
· The theory behind the grant of tax exemptions is that such act will benefit the body of
the people. It is not based on the idea of lessening the burden of the individual owners of
property.
Grounds for granting tax exemptions
1) May be based on contract. In such a case, the public, which is represented
by the
government is supposed to receive a full equivalent therefor, i.e. charter of
a corporation.
2) May be based on some ground of public policy, i.e., to encourage new
industries or to
foster charitable institutions. Here, the government need not receive any
consideration in
return for the tax exemption.
3) May be based on grounds of reciprocity or to lessen the rigors of
international double orNature of tax exemption
1) It is amultiple taxationprivilege of the grantee.
mere personal
2) It is Note:
generally revocable
Equity is not a by the government
ground unless the
for tax exemption. exemption
Exemption is
is allowed only if
there is a clearfounded on a contract which is contract which is protected from
impairment.provision therefor.
3) It implies a waiver on the part of the government of its right to
collect what otherwise would be due to it, and so is prejudicial thereto.
4) It is not necessarily discriminatory so long as the exemption has a
reasonable foundation or rational basis.
 CALTEX vs. COA
In claiming tax exemption, the burden of proof lies upon the claimant
- It cannot be created by mere implication
- It cannot be presumed that you are entitled to tax exemption
- You must prove it
RULE:
- Taxation is the rule and exemption is the exception

PROPERTY TAX – GOVERNMENT PROPERTY

Properties owned by the government whether in their proprietary
or
governmental capacity are exempt from real estate tax
TEST: - OWNERSHIP
Once established that it belongs to the government, the
nature of the use of
the property whether proprietary or sovereign becomes
immaterial.
* Exemption of public property from taxation does not
extend to
improvements therein made by occupants or claimants
at their own
expense.

Nature of power to grant tax exemption

1) National government
- The power to grant tax exemptions is an attribute of sovereignty for
the power to
prescribe who or what persons or property shall not be taxed.
- It is inherent in the exercise of the power to tax that the sovereign
state be free to
select the subjects of taxation and to grant exemptions therefrom.
- Unless restricted by the Constitution, the legislative power to
exempt is as broad as
its power to tax.

2) Local governments
- Municipal corporations are clothed with no inherent power to tax or grant
tax exemptions.
- But the moment the power to impose a particular tax is granted, they also
have the power
to grant exemption therefrom unless forbidden by some provision of the
Constitution or the law
- The legislature may delegate its power to grant tax exemptions to the
same extent that it
may exercise the power to exempt.

Basco vs. PAGCOR (196 SCRA 52): The power to tax municipal corporations must
always yield to a legislative act which is superior, having been passed by the State
itself. Municipal corporations are mere creatures of Congress which has the power
Chavez
to createv.andPCGG, G.R.
abolish No. 130716,
municipal 09 December
corporations due to1998
its general legislative powers. If
·Congress
In a compromise agreement between the Philippine Government,
can grant the power to tax, it can also provide represented
for exemptions or evenbytake
the
backPCGG, and the Marcos heirs, the PCGG granted tax exemptions to the assets
the power.
which will be apportioned to the Marcos heirs. The Supreme Court ruled that the
PCGG has absolutely no power to grant tax exemptions, even under the cover of its
authority to compromise ill gotten wealth cases. The grant of tax exemptions is the
exclusive prerogative of the Congress.
· In fact, the Supreme Court even stated that Congress itself cannot grant tax
exemptions in the case at bar because it will violate the equal protection clause of
the Constitution.
 Interpretation of the laws granting tax exemptions
· General rule - In the construction of tax statutes, exemptions are not favored
and are
construed strictissimi juris against the taxpayer. The
fundamental theory is that
all taxable property should bear its share in the cost and
expense of the
government.
- He who claims exemption must be able to justify his claim or
right thereto by a
grant express in terms “too plain to be mistaken and too
categorical to be
misinterpreted.” If not expressly mentioned in the law, it
must be at least
within its purview by clear legislative intent.

· Exceptions
1) When the law itself expressly provides for a liberal construction
thereof.
2) In cases of exemptions granted to religious, charitable and
educational institutions
or to the government or its agencies or to public property because
the general rule
is that they are exempt from tax.
Strict interpretation does not apply to the government and its agencies
· Petitioner cannot invoke the rule on stritissimi juris with respect to the interpretation
of statutes granting tax exemptions to the NPC. The rule on strict interpretation does
not apply in the case of exemptions in favor of a political subdivision or
instrumentality of the government. [Maceda v. Macaraig]

Davao Gulf v. Commissioner, 293 SCRA 76 (1998)

· A tax cannot be imposed unless it is supported by the clear and express language of a
statute; on the other hand, once the tax is unquestionably imposed, “a claim of
exemption from tax payers must be clearly shown and based on language in the law too
plain to be mistaken.” Since the partial refund authorized under Section 5, RA 1435, is
in the nature of a tax exemption, it must be construed strictissimi juris against the
grantee. Hence, petitioner’s claim of refund on the basis of the specific taxes it actually
paid must expressly be granted in a statute stated in a language too clear to be mistaken.
· > Exemption of the buyer does not extend to the seller
Ø Exemption of the principal does not extend to the accessory

SURIGAO vs. COLLECTOR of CUSTOMS

- Tax refunds, condonations and amnesties, they being in the nature
of tax exemptions must be strictly construed against the taxpayer
and liberally in favor of the government.

Tax remission or tax condonation

· The word “remit” means to desist or refrain from exacting, inflicting or
enforcing
something as well as to restore what has already been taken. The
remission of taxes due
and payable to the exclusion of taxes already collected does not constitute
unfair
discrimination. Such a set of taxes is a class by itself and the law would be
open to attack as
 class legislation only if all taxpayers belonging to one class were not
treated alike. [Juan
Luna Subd. V. Sarmiento, 91 Phil 370]

The condition of a tax liability is equivalent to and is in the nature of a tax

exemption. Thus, it should be sustained only when expressly provided in the law.
[Surigao Consolidated Mining v. Commissioner of Internal Revenue, 9 SCRA 728]

CONSTITUTIONAL RESTRICTION:
“No law granting any tax exemption shall be passed without the
concurrence of a
majority of all members of Congress.” (Sec. 28 (4) ART VI)

PROV. OF NUEVA ECIJA vs. IMPERIAL MINING

Basis or test for real property taxation is use and not ownership. Thus, it does not
matter who the owner of the property is even if it is not tax exempt entity, as long as
it is being used for religious, charitable or educational purposes, then it is tax exempt.
Conversely, even if the property taxation is owned by the government if the
beneficial use has been granted, for consideration or otherwise, to a taxable person,
then the property is subject to tax.
6) EVASION - It is also known as “tax dodging”
- It is punishable by law
- Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or
lessen the
payment of tax.

ELEMENTS OF TAX EVASION - Tax evasion connotes the integration of three (3)
factors:
1) The end to be achieved, i.e. payment of less than that known by the taxpayer to
be legally due,
or paying no tax when it is shown that tax is due
2) An accompanying state of mind which is described as being “evil”, “in bad
faith”, “willful”, or
“deliberate” and not “accidental”
3) A course of action (or failure of action) which is unlawful

INDICIA of FRAUD IN TAX EVASION

1) Failure to declare for taxation purposes true and actual income derived from
business for two (2)
consecutive years; or
2) Substantial under declaration of income tax returns of the taxpayer for four (4)
consecutive years
coupled with unintentional overstatement of deductions

*** EVIDENCE TO PROVE TAX EVASION

-Since fraud is a state of mind, it need not be proved by direct evidence but
may be proved
from the circumstances of the case.

REPUBLIC vs. GONZALES (13 SCRA 638)

- Failure of the taxpayer to declare for taxation purposes his true and actual
income derived from his business for two (2) consecutive years is an indication
of his fraudulent intent to cheat the government of its due taxes.