EIC{:I

m

For thoir kind underctrnding and generooity in allowing the Association of Law Students of tltoPtilippino to grart to thcir patriarch thc posthumous BENJAMIN B. ABAN t-AW PROFESSOR

OFTHEYEARAWARD;

For such gesturo, thoy havc allowed thc Aesociation, in its very modcst wa5 to show apprcciation

for thc contribution of Profoasor BENJAMIN B. ABAN in a vory domanding disciplinc which he

faithfully sorvod whilc rtill living, ths Award givon during the loth National Confercnce of LawStudents throughout thc couutry wherc Oe studoflts discussed the thems "The Rolc of law Stu-

dents in tho Next Millotnium."

Given thie 7th day of Novembcr 1999, at Oc Traders Hotel, Roxag Boulovard, Metro Mmila.

tu{rs, 9{ntwilnd A, 6 an d f affiiqy

- kl,''"t.'-('t-mnuofw meNcrscA A. caBIE

Assoclation of Lnw Studenh of the PhlllppinesItfuulr

awardr this

CERTIFICATE OF APPRECIATION

National Ctairman

TABLE OF CONTENTS

Page

(lhapter I. GENERAL PRINCIPLES

,'flilxation Defined 1

.'l'axes Defined 1

Irnportance of Taxes 3

'['axes, Personal to Taxpayer ..'.'....".....'. 3

Nature of the Taxing Power 4

lurposes and Objectives of Taxation 5/'l'heory and Basis of Taxation 7

/lcope of the Legislative Taxing Power ............'.'...... 8

ls the Power to Tax the Power to Destroy? 9

Constitutional Restraints Re: "Taxation is thePower to Destroy" 9

Power of Judicial Review in Taxation .:.............'.... 11

Aspects of Taxation L2

llasic Principles of a Sound Tax System 12

Taxation Distinguished from Police Power andEminent Domain 13

Taxes Distinguished from Other Impositions 14

Taxes Classified 23

Taxpayer's Suit............ 28

Cases 29

Exercises 49

hapter II. LIMITATIONS ON THE TAXING POWER

Inherent Limitations on the Taxing Power

B. Non-Delegability of the Taxing PowerC. Tenitoriality or the Situs of TaxationD. Exemption of the Government from TaxesE. International Comity

Constitutional Limitations on the Taxing PowerConstitutional Limitations Explained ..'...'..........

A. Due Process of LawB. Equal Protection of the Law ............C. Freedom of Speech and of the PressD. Non-Infringement of Religious FreedomE. Non-Impairment of Contracts

C)

53535457646566o/6770737577

vtl

rILAW OF'BASIC TAXATION IN THIT P}IILIPPINES

Poge

F. Non-Imprisonment for Debt or Non-Paymentof PoIl Tax ........'...

G. Origin of Appropriation, Revenue and Tariff BiIIs ".'"""'H. Uniformity, Equitability and Progressivity of Taxation '

I.DelegationofLegislativeAuthoritytoFixTariffRates,Import and Export Quotas, etc' ".'""""'

J. Tax Exemption of Properties Actually, Directly and

Exclusively Used for Religious, Charitable and

K. Voting Requirements in Connection with theLegislative Grant of Tax Exemption

L. Non'Impairment of the Supreme Court's Jurisdictionin Tax Cases

M. Tax Exemption of Revenues and Assets, includingGrants, Endowments, Donations or Contributionsto Educational Institutions """"""'

Other Constitutional Provisions Related to Taxation

CasesExercises

ChapteTIII.DoUBLETAXATIoNANDTAxEXEMPTIoNS

Double Taxation Defined ""' 113

No Prohibition Against Double Taxation """"""""" 113

Kinds of Double Taxation "" 113

Means Employed to Avoid Double Taxation """"".'""""""""""' 115

Tax Exemptions.....'...'. """"" 118

Kinds of Tax ExemPtions ""' 118

Principles Governing Tax Exemptions """""' """""" 118

Illustrative Situations on Tax Exemptions "".'""""' 120

Tax-Exempt Persons Required to Keep Books of Accounts """"' 124

Tax Avoidance; Tax Evasion; Tax Fraud """""""""' L24

cases ................... 128

Exercises """""" 141

Chapter IV. TAX LAWS AND REGULATIONS

Nature of Tax Laws .--'.'.... "" 143

Interpretation of Tax Laws """"""""""" 144

Sources of Tax Laws ......'... "' 145

80-80

81

83

84

87

87

8892

94110

VIII

TABLE OF CONTENTS

Page

Mandatory and Directory Provisions ................. ........ 145

Ilublication Requirement .................. ....... L47

Are Tax Laws Special Laws? ................... 148'l'ax Regulations .......... .......... 148

1'ax Rulings.................. .......... 149

I'ower of the Commissioner to Interpret Tax Lawsand to Decide Tax Cases ..................... 150

Non-Retroactivity of Rulings ................... 150

Legislative Adoption of Tax Rulings ...... L52Doctrine of Implications.............. ............. L52'lax Treaties and International Agreements .......,.... 153

Cases .........,.,....... 154

Exercises ............ 168

Chapter V. TAX ADMINISTRATION AND ENFORCEMENT

Agencies Involved in Tax Administration ............ ..... 170

Bureau of Internal Revenue .................... 170

Agents and Deputies for Collection of National InternalRevenue Taxes .................. 172

Powers and Duties of the Bureau of Internal Revenue ............... 172Power and Duty of the Commissioner to Interpret

Laws and to Decide Tax Cases ........... L72Appellate Jurisdiction of the Court of Tax Appeals ..................... 173

RuIe of "No Estoppel Against the Government" ....... 173Is There Estoppel Against the Taxpayer? .............. ... L75Nature and Kinds of Assessments.............. ................ 175Principles Governing Tax Assessrnents............ ......... 176

Investigative Powers of the Commissioner;Factual Basis of Assessments................. ............... 178

Means Employed in the Assessment of Taxes .......... 779.

A. Examination of Returns; Confidentiality Rule ................... 179

B. Assessments Based on the Best Evidence Obtainable ......' 181

C. Inventory-Taking, Surveillance and PresumptiveGross Sales and Receipts.................. ............ 182

D. Termination of Taxable Period ..... 183

E. Fixing of Real Property Values ..... 183

F. Inquiry into Bank Deposits ........... 183

G. Accreditation and Registration of Tax Agents.................... 184

ix

l,AW Ot' IJASI()'l'AXA'flON lN'l'lI I'l l)llll,ll'lrlNlls

H. Imposition of Additional Procedural orDocumentary Requirements.'..".'....

Enforcement of Forfeitures and Penalties... ......'.......

Supervisory and Police Powers of the BIR '...'......'Authority of the Commissioner to Delegate Power

Powers and Duties of the Regional DirectorDuties of Revenue District Officers and

Other Internal Revenue OfficersSources of RevenueBrief Survey of Compliance Requirements,

Statutory Offenses and Penalties .........".....

A. Compliance RequirementsB. Statutory Offenses and Penalties ... ".....'.....

L Additions to the Tax ............:.............i,'."II. Statutory Offenses and Penalties ..............'.

a. General Considerations ..............

b. Survey of Some Specific Offenses and Penalties '..

c. Forfeitures .............

CasesExercises

Puge

188188t921.92

193794

195

198

19819820720721_3

2t3214222223qqo

23t231232233233235237244

245

Chapter VI. TAX REMEDIES -

REMEDIES OF THE GOVERNMENT

Importance of Tax Remedies ...'.....:......-........

Rule on "No Injunction to Restrain Tax Collection"

Collectibility of Tax as a Basis for Collection Enforcement ......'

Remedies of the Government '.........'......Tax LiensCompromises................Collection by Distraint and Levy .........:.'

Civil ActionCollection in Cases Where the Assessment is Final

and Unappealable't

Collection in Ca'bes Where the BIR's Decision isFinal, Executory and Demandable .........' '."""""" 246

Defenses Precluded by Final and Executory Assessments ......." 247

Prescription of Government's Right to Assess .".""" 248

,I'AI}LU OIT UONTIINTS

Page

()olk-rction Thru Filing of the BIR's Answer in the CTA.".........'. 248

l,inbility of Stockholders for Unpaid Taxes ofDissolved or Defunct Corporation ..... 248

(lollcction Thru Application of a Disputed TaxAgainst a Refundable Tax .......".'.....- 250

(lrirninal Action ........-'.....'...' 250(1lscs ...'..'...'....... 255

l,lxorcises .,....'..-. 265

(ihlpter VII. TAX REMEDIES - BEMEDIES OF THEGOVEBNMENT - STATUTE OF LIMITATIONS

l)rcscription of Government's Right to Assess Taxes ........'....-.-.- 267

Whon is a Tax Assessment Deemed Made? ".'..."..-... 268

ll,Lrlease of Assessment Notice or Demand Before theLapse of the Prescriptive Period --.-.... 269

I rnportant Considerations Re Prescription of(lovernment's Right to Assess Taxes ....................270A. Date of Filing Tax Returns - A Material Factor

in Resolving Questions on Prescription..'.."'.. ". ............. 27 O

B. Effect of Filing an Amended Return ...........-..'- 277

C. Effect of Filing a Wrong Return'.'...'. ......'.'.......272D. Period Applicable When the Law Does Not Require

the Filing of Any Return ........... 272

E. Applicable Prescriptive Period if Taxpayer Failsto File a Beturn.... ....'...........:..-. 273

F. Prescriptive Period of Assessment When Thereis Fraud ..................274

llrescription of Government's Right to Collect Taxes .'.....'......'... 281

I4quitable Recoupment and Preecription ...................287

Interruption of the Prescriptive Period ...............'..'.. 287

RuIe of Prescription in Criminal Cases .'.............'-'... 293

When Defense of Prescription May be Raised Even on Appeal .. 294

Prescriptive Period in Criminal Cases ' When Does ItStart to Run? .......... ......-.- 294

Exercises ........... 311

xl

.1

l,nw ()l' llAslc TAXA'I'ION lN'l't{ll l'tlll'lt')PlNLS

Page

Chapter VIII. TAXPAYER'S REMEDIES

Administrative Protests """"""""" """" 313

Effect of Taxpayer's Failure to File an AdministrativeProtest o" to App"ul the BIR's Decision to the Court of

Tax Appeals .,'........'..... "" 320

Refund or Recovery of Erroneously or IIlegaIIyCollected Taxes """""""' 321

Distinction Between Tax Refund and Tax Credit""""""""""""' 325

IsPaymentUnderProtestNecessaryinClaimsforRefund?....,326Principle of Equitable Recoupment in Relation to

Tax Refunds....."...."""' "' 336

Legal Capacity of Withholding Agents to Claim Refund """"""' 336

Interest on Tax Refunds""' """"""""""' 337

Cases """"""""" 338

Exercises """""' 352

Chapter IX. COURT OF TAX APPEALS

Origin of the Court of Tax Appea1s""""""""" '""""" 354

Salient Features of the Court of Tax Appeais """"" 354

Organization, Quorum; Disposition of Cases"Brought

Before the Tax Court""""" """"""""""" 355

Powers of the Court of Tax Appeals """"""""" """"' 356

Jurisd.iction of the Court of Tax Appeals """""""""' 356

"Compromise Penalties" and the CTA """""' """""" 359

Whose Decisions Are Appealable? """""' """""""""' 359

What Decisions Are Appealable - The Question of Finality """' 360

Tax Collection Not Suspended During Appeal"""' "' 362

Thirty-Dav Prescriptive Period of Appeal """"""""' 363

AdministrrrtiveActionsTantamounttoAppealableDecisions'..366Appeal from Decisions of the CTA """"' 369

Interlocut,ory Orders """""" 374

Findings of Iract of the CTA, Not Reviewable """""' 375

Ancillary Jurisdiction of the CTA """"" 379

Other Matters Bearing upon the CTA """""' """""" 380

Damages in C'l'A Proceedings """""""" 380

Cases """"""""" 381

Exercises """"" 388

'IAIILE ()l'(I0NTENTS

Page

('hlptcr X. LOCAL TAXATION

Nrrture and Source of Local Taxing Power ...'.'....'....' 391

( lrant of Local Taxing Power under Existing Law .'....................' 393

I)ower to Prescribe Penalties for Tax Violationsand Limitations Thereon....-.'.........' "' 394

l'ower to Grant Local Tax Exemptions .............'....".' 394

l'ower to Adjust Local Tax Rates....."... ..........'.."."."' 396

ll,osidual Taxing Powers of Local Governments........,.'.......'." "" " 396

l'rcemption or Exclusionary Rule """""' 397

lrundamental Principles of Local Taxing Power """' 399

lrr-rndamental Principles Briefly Explained ."."".""" 400

()ommon Limitations on Local Taxing Power """""' 401

()ommon Lirrritations Explained """""" 402

l,cvying of Local Taxes - Local Ordinances """""""' 406

llrief Survey of Taxes and Other Impositions thatLocal Governments May Levy - Enumerated Taxes """""""' 407

Situs of Local Taxation ........'...'. ........"."' 412()ommon Revenue-Raising Powers ......'.......'.. """""" 416

Oommunity Tax............. """' 4L7

(lollection of Local Taxes .... 418

tlemedies of the Taxpayer in Local Taxation """""" 422

(lases .................. 424

I,)xercises """"" 434

( llrapter XI. REAL PROPERTY TAXATION

A. Substantive Aspect of Real Property Taxation "" 436

Real Property Tax Defined """"""""' 436

Nature and Scope of the Local Taxing Power inReaI Property Taxation '.."""""" 437

Extent of Local Taxing Power """""" 438

Power to Prescribe Penalties for Tax Violations '."""""""""' 438

Fundamental Principles GoverningReaI Propertv Taxation """""""' 439'

Question of Tax Exemptions - Properties Exempt from Tax 441

Proof of Tax Exemption......'.""' """"" 442

Brief Survey of Cases Involving Real PropertyTax Exemptions......'.." """"""""" 443

xrlt

I,AW OTI I]ASIC TAXA'I'ION lN'I'IIIi PTIII'IPPINT)S

Page

Real Properties Subject to Tax""""' """"""""""" 444

Some Court Rulings on the Question of Taxabilityof Real ProPertY."' "" 445

"I]se" and "Ownership" In Real Property Taxation """""""" 447

Rule Applied Where the Person Assessed is

Neither Owner Nor User - Concordiu Lim Case"""""""' 448

B. Administration of the Real Property Tax """"""""""""""""' 450

Basic Considerations Relating to the Administrationof the ReaI Estate Tax """"""' ""' 450

I. Administrative Requirements """""""" """"' 450

II. Listing of Property for Assessment Purposes -Assessment RoIl """""" """""' 452

tII. ReaI Property Tax Assessment in General "" 452

IV. Mechanics of Assessment """""" 455

C. Remedies in ReaI Property Taxation """""""""" 458

I. Remedies of Local Governments """".'".'" ""' 458

II. Remedies of the Taxpayer """""" 462

(a) Remedy Against the Assessment """"""""""""""""" 462

( i) The Local Board of Assessment Appeals """"""" 464

(ii) The Central Board of Assessment Appeals """"" 464

(iii) pffect of Appeal on the Payment of

RealProperty Tax """"' """"""""""" 464

(b) Administrative Protest """"" 465

(c) Tax Refund or Credit .'"""""' 466

Special Levies on Real Property """""""" """"""""' 466

Condonation of ReaI Property Taxes """ 468

Cases """"""".'" 468

Exercises """""" 489

Chapter XII. TARIFF AND CUSTOMS LAWS

A. Substantive Aspect of Tariff and Customs Laws """""""""" 492

Meaning and Scope of Tariff and Customs Laws """""""""" 492

Nature of Cusioms Duties and Tariff" """"""""" 493

Concept of Goods for Customs Duty Purposes """.'""""""""' 493

Kinds of Goods """"""""" 494

Importation, Liability and Tax Liens """"' """"" 506

Importations Vis-i-vis Powers and Jurisdiction

of the Bureau of Customs """' ""' 507

Kinds of Customs Duties """""""""' 507

't'A tll,u ol' (l( ) N'l'liN'l's

Page

Vrrlrration of Goods ........... 508

Ilonro (lonsumption Va1ue (HCV) ...... 510

l,'lcxible Tariff ......... .......... 511

It. Acl ministrative Aspect of Tariff and Customs Laws............... 513'l'rrriff Commission ........... 513

lltrreau of Customs .......... 515

lrrrnctions of the Bureau of Customs ................."".. 515

Ot,hcr Powers and Duties of the Bureau of Customs ........"..... 515

(' l'rricr.rdural Aspect of Tariff and Customs Laws ................"..'.. 515

Nirt,ure of Customs Protesb; Seizure and Forfeiture Cases.... 515porfeiture Cases .......... 515-

I)rocedure in Customs Protest Cases .................... 516

Atrl,omatic Review in Customs Proceedings ......... 518(ltrstoms Seizure and Forfeiture Cases - Basic Concepts......' 518

Srrrne Court Rulings on Searches and Seizures ..................-.... 521(iustoms Forfeiture Actions ................ 523

l'roperties Subject to Forfeiture................. ...........536(lornmon Carriers; Forfeiture ............. 538

oLhcr Considerations Affecting Seizure andlt'orfeiture Cases .......... 538

Sorne Illustrative Court Rulings onCustoms Forfeiture Cases '...'....'..' 539

( )llrcr Considerations Relating to Tariff and Customs Cases .... 541( lls(rs ................... 543

f,jx.rr:ises ............577

Chapter I

GENERAL PRINCIPLES

'I'AXATION DEFINED. Taxation is the power by which the,r{,!(.r'ci[an, through its law-making body, r35:'s revenue to defrayllrl rrccessary expenses of government. Ii is merely a way of:rplrort,ioning the costs of government among those who in some

lll1,]ll.ittrearepriv@efitsandmustbearitsburdens1;,1 tltrt" Jur. 34).

Irr one decided case, the Supreme Court of the Philippinesrl,'r;t:r'illcd it as a "syml:iotic" relationship whereby in exchange forI lrr. lrrgtoction thaf lhe citizens gel from the Government, laxes are

;,,r rrl (( iLtn'rrnissioner of ll,ternal Reuenue u. Algue, Inc., et al., L-28896,I,','1,. 17, 1988).

'l'hc rationale of taxation is graphically described by the Supreme('.lu't, in these words: "It is said that taxes are what we pay for, rv rlized society. without taxes, the government would be paralyzed1,,r. lltck of the motive power to activate and operate it. Hence, despitetlrc rrirtural reluctance to surrender part of one's hard-earned incomeIo l [rr taxing authorities, every person who is able must contributelr rs share in the running of the government. The government for its1,rr|t, is expected to respond in the form of tangible and intangiblelrr,rrofits intended to improve the Iives of the people and enhancellr('ir moral and material values. The symbiotic relationship is theI rrl,ionale of taxation and should dispel the erroneous notion that itr:r irn arbitrary method of exaction by those in the seat of power"(:;tr.pra).

Moreover, fair-dealing on both sides of this symbiotic relationshiprs ()1'paramount importance in order to maintain its harmoniousr.lritracter. As stated by the supreme court, "taxpayers owe honestyl.o government just as government owes fairness to taxpayers"1(lommissioner of Interna.l Reuenue u. Tokyo Shipping Co., Ltd., etc.,

r't, al., G.R. No. 68252, May 26, 1995). "If the State expects itsLaxpayers to observe fairness and honesty in paying their taxes, so

rnust it apply the same standards against itself x x x' No one' not.ven the Siui", should enrich itselfat the expense ofanother' x x x"(BPI-Family Sauings Baruk, Inc. u. Court of Appeals, et al., G.R-

No. 122480, Apr. 12, 2000)'

Ln w olr ltnsl(:'l'n xA'l'loN tN,t'ilt, I,ilU,il't,lNI,tFi

'rAxES DEFINED. 'faxr:s arc trrc e.rbrcect pr.port,io,.rcontributions from persons and property leviecl by the law-makingbody of the state by virtue of its sovereignty for the support ofgovernment and for public needs (l Cooley 62_65).

From this definition, the foilowing may be said to be theattributes or characteristics of taxes:

(a) A tax is a forced charge, imposition or contribution and assuch it operates in inuitum, which means that it is in no waydependent on the will or contractual assent, express or implied, ofthe person taxed. They are not contracts, either expressed or implied,but positive acts of government (Rochester u. Bloss, lrs Ny 42, zrNE 794, 61 LRA [NS] Ann T, Cas. 1S).

(b) It is a pecuniary burden payable in money, such that a tax isnot necessariiy confined to those payable in money (r cooley 6J), asin the case, for instance, of backpay certificates which underR.A. 304 could be used as payment of taxes (De Borja u. Geila,L-18330, July 31, 196J).

In one case, the supreme court held that backpay certificatesunder R.A' 304 may be used to pay real estate taxes (Tirona u. cityTreasurer of Manila, et al., L-24607, Jan. 2g, 196S).

(c) It is levied by the legislative body of the state because thetaxing power is peculiarly and exclusively legislative in character(51 Am. Jur. 71). Taxes are obligations created by la* (Vera, etc., etal. u. Fernarudez, etc., et al., L-SlJ64, Mar. 50, lif il.

(d) It is assessed in accordance with some reasonable rule ofapportionment, which means that conformably with theconstitutional mandate on progressivity of a taxing system(sec. 28[1J, Art. vI, 1g8T constitution), taxes must be based on abilityto pay.

Do regressiue taxes go against the constitutional mond,ate in,Sec. 28(1), Art. VI of the Constitution?

In the case of Philippi*e Airli*es, Inc. u. secretary of Fi*ance,et al. (G.R. No. 115852, Oct. 30, 199b [Resolution]), and companioncases' the supreme court, in upholding the validity of the ExpandedValue-Added Tax Law (R.A. 7716), said:

"The constitution does not realry prohibit the impositionof indirect taxes which, Iike the VAT, are regresslve. Whatit simply provides is that congress shaUeuotie a progressivesystem of taxation.'x x x Resort to i,direct taxes should beminimized but not ouoided entirely because it is difficult, if

( ; I,)NliltAl, I'Iil NCI l,l,l,:s

rr.l nulrossible, to avoid them by imposing such taxes,,,,,,r'rling t<-r t.he taxpayers'ability to pay. x x x"

1,.) ll. is irnposed by the State on persons, property or services,. rtlrrrr rl:r jrrrisdiction.

(l) lfirrally, a tax is levied for a public purpose as taxation inrt,,,.ll rrrvolvcs a burden to provide revenue for public purposes of ar,,.r{'r'rl ttrtt,ure (51 Am. Jur. 39).

,,\ I rrx r:reates a civil liability on the part of a delinquent taxpayer,,r lt lr,rutrlr t,he non-payment thereof (whether it be on account of theri,{t,rr\,(.r's lailure or refusal to pay it) creates a criminal liability,,. l,r, lr cotrld be the subject of criminal prosecution under existing1,, r1 ,r lrr short, in taxation, it is one's civil liability to pay taxes thatr, r.,. r r rrir' (,u crirninal liability, not the other way around as in criminal, J, ,,.,, wlrcre criminal liability gives rise to a civil liability (Republict. I'trlrutuo, L-22356, July 21, 1967).

I M I'|ORTANCE OF TAXES. Taxes are important because they,,r! tlrr,-lj,fehlood of the Government and so should be ca]culated,. r r I r r r r r I I-r n necessary hindranc e (Co m mis sion er of Internal Reuenue, ll1'ttt', 1ruc., et al., supra). The legislature, in adopting measures1,, inrt)l('nlent our tax laws, wants to be assured that taxes are paid,rr,l crrllccted without delay (Philippine Guaranty, Co-, Inc. u.I t,rnni:;sioner of Internal Reuenue, et al., L-22074, Sept. 6, 1965).ll, rrrli l,hr: lifeblood of the Government, their prompt and certain,',,rrl:rlrility is an imperious need (Collector of Internal Reuenue u.

t,,,,rrlr itlr, International Rubber Co., L-22265, Dec. 22, 1967, citing!tr,ll r,. Il-5.,79 L. Ed. 1421-27). Further, "(t)he primary purpose isr,, 1i.rrt.r'ate funds for the State to finance the needs of the citizenry,rrrl lo ndvance the common weal. Due process of Iaw under thet ',,rr:;l rt,ution does not require judicial proceedings in tax cases. This,rrrr';1 necessarily be so because it is upon taxation that therl"\,(.r'nment chiefly relies to obtain the means to carry on its't" r'rt,ions and it is of utmost importance that the modes adopted io

, rrl.r'(:e the collection of taxes levied should be summary andrrrr,.rf'ered with as little as possible" (Philippine Bank ofr',,rtrrnunications u. Commissioner of Internal Reuenu.e, et al., G.R.l'1,, I 19024, Jan. 28, 1999).

'I'AXES, PERSONAL TO TAXPAYER. Taxes are personal tollrr. l,uxpayer. A corporatiori's tax delinquency cannot, for instance,l,r'r'nlbrced against its stockholders because not only would this run'(,unLcr to the principle that taxes are personal, but it would also

t,Aw ot,' BASTC l'AxA',t'lON lN',l'll U t'ilil,lt,t,lNlts

not be in accord with the rule that a corporation is vested by lawwith a personality that is separate and distinct from those of thepersons composing it, as well as from that of any other legal entityto which it may be related (Sunio, et al. u. Nationq.l Labor RelationsCommission, et al., G..8. No. 57767, Jan. 31, 1984 cited in Torres,Law of Business Organizations, p. 126).

Be that as it may, however, stockholders may be held liable forthe unpaid taxes of a dissolved corporation if it appears that thecorporate assets have passed into their hands (Tan Tiong Bio u.

Commissioner of Internal Reuenue, L-15778, Apr. 23, 1962), or whenstockholders have unpaid subscriptions to the capital of thecorporation.

Similarly, estate taxes accruing upon transmission of thedecedent's estate to his heirs are not liabilities which can be enforcedagainst his heirs, for estate taxes are supposed to be obligations thatmust be paid by the executor/administrator out of the net estate,before delivery to any beneficiary ofhis distributive share.

However, if prior to the payment of the estate tax due on thetransfer of decedent's estate, the properties of the deceased aredistributed to any beneficiary, then such beneficiary shall besubsidiarily liable for the payment of such portion of the estate taxas his distributive share bears to the total value of the net estate(Sec. 9 1 ICJ, National Internal Reuenue Code of 199 7 /hereafter , 1997NrRCI).

NATURE OF THE TA)ilNG POWER. The power to tax is anattribute of sovereignty. It is inherent in the State. As an incidentof sovereignty, the power to tax has been described as "unlimited inits range, acknowledging in its very nature no limits, so that securityagainst its abuse is to be found only in the responsibility of thelegislature which imposes the tax on the constituency who are topay it" (Moctan Cebu International Airport Authority u. Marcos, etc.,et al., G.R. No. 120082, Sept. 11, 1996).In one decided case, theSupreme Court called it an awesome power. However, no matterhow awesome it may be, it must not be exercised arbitrarily(Commissioner of Internol Reuenue u. Algue, Inc., supra).

Taxation is a power emanating from lneeessity; a necessaryburden to preserve the State's sovereignty,Strt a means to give thecitizenry an army to resist an aggression,ydavy to defend its shoresfrom invasionr"aCorps of civil servants to'serve, public improvementdesigned for the enjoyment of the citizenry and those which comewithin the State's territory and facilities, and protection which a

( ll,lN l,llt^l, l'ltlNCll Pl,us

r.,,\, r rrrrt.ttl is sttplt,se tl t,o provide (Philippine Guaranty Co" Inc' u'

| \,rrtnt:;:;irtttt't'ttl lttl,arnul Reuenue, et al', supra)' As st'ated'in onc

' ,1 'r' ( l,tt:tttt Sle.otttloring Corp. u' CTA, et al'' L-30232' July 29' 1988)'

I ,r c;rl rorr is a high p"eJogative of sovereignty the relinquishment of

,r lrrr'lr rs ttLrver pr""rrrrrut, and any reduction or diminution thereof

,.,rt lr r.r,sperct t,o its mode or rate must be strictly construed and the

,,,,',,. ,',,,r1 bc couched in clear terms' [!e general-rulejslhat any

' Irrrrr lirr cxempfion from tax statutesKhould be construed strictly,r I I rr r r r ril, t,htl_!g>rgaYer'

lnr:itlentally, the power to tax is not granted in the Constitution'

t ',,rr;il rt.ulictnal provisions relating to the power of taxation d6 not

rr1,r'r;rlt its grants of the power oitaxation to the Government,,"WrtI rrr';l.ir(l rnerely .orrrtgrrgliA$gtions upon a power yhich would

,,1lr, r'wrst'be pr?[tically without limtt'

A:; trlready mentioned, the taxing power is- peculiarly and

, ,., lrr:rivcly Iegislati,re in character and remains undiminished in the

1,,1.r:;l:rt,rtre in the absence of an express surrender thereof'glear and

..1,lrt.it,initsterms(sl,q,*Jur.il-zavIrbe_@9tt,, ittlrorcnt and constitutional iimitationb'

I'I III I'OSES AND OBJECTIVES OF TAXATION

(ti Reuenue - Basically, the purpose of taxation is to provide

, ,,,,i,,i,,.'fr fo with which the State promotes the general welfare

,,,,1 1,r'ol,cct,ion of its cilizens (51 Am' Jur' 71'73)'

rltt Repulation. - Taxation also has a regulatory purpose as in,77..----

r1,,.(:rse of taxes tevied on excises or privileges like thoseimposed

,,rr l,lraggo and alcoholic products, or amusement places like night

1,, l,s. "[bu""tr, cockPit$ftc

,l,,,xation-is not rnlely a power that is exercised in order to raise

r(,\'(.nue for the ,rppori of the Government' Taxes may also be

,,,'t,osed for a regulatory purpose as' for instance' in the

,, . I r r r b ilitatio' urrd. itubitiruiio.r-gi ",lhreatened iqdg.ltry wXiEET

,,''i,.,'r; Tte;Ffrlloi[ffi'trrr' o. Commission o"=a-,"ait, et al', G'R' No' 92585' May 8' 1992)'

(t'.\ Prom.otion. of General Welfare - In one decided case' the

;1,,r,.J*1, be used as an imPlement of

rl,,: police power in order to promote the general welfare of the peopie.

'lhus, in the case of Lutz u' Araneta (98 Phil' 148)' the Supreme

('orrrt upheld the validity of the Sugar Adjustment Act' which

,rrrposed a tax on milled sugar since the purpose of the law was to

r['l,AW Ol,' l]ASIO'lAxATloN IN',l'll l'l l'}llll,lt'l'lNl'll-j

strengthen an industry that is so undeniably vital to the economy -the sugar industrY.

How the police power is enhanced through taxation is furtherillustrated in the existence of the oil Price stabilization Fund(oPSF), a device designed to protect the public from the adverse

effects of fluctuations in the prices of imported crude oil'

As ruled in the case qf Osmefi,a u. Orbos, etc., et ol' (G'R'

No. 99886, Mar. 31, 1993), while the funds collected under the OPSF

may be referred to as taxes, they are exacted in the exercise of thepolice power of the State. From such fund, amounts are drawn to

reimburse oil companies when appropriate situations arise forincreases in, as well as under-recovery of, the cost of crude oilimportation.

(d) Red.uction of social Inequality - This is made possible throughthe proglessive system of taxation where the objective is to prevent

the undue concentration of wealth in the hands of a few individuals.Progressivity is keystoned on the principle that those who are able

to pay should shoulder the bigger portion of the tax burden'Incidentally, the present rates ofincome, estate and gift taxes present

a good example of progressivitY.

(e) Encourage Economic Growth - Taxation does not only raisepublic r&enue, but in the realm of tax exemptions and tax reliefs,ior instance, the purpose is to grant incentives or exemptions in order

to encourage investments and thereby promote the country'seconomic growth.

It is worthwhile to note that since the power to tax is inherentin the state, the power to exempt from tax is inherent in the statealso. This is not necessarily so in the domain of local taxation. Since

in local taxation, the taxing power is only delegated, i.e., either underthe constitution or by virtue of legislation or both, it follows that inorder to grant tax exemptions, Iocal governments must justify itsexercise under constitutional or statutory law or both, as the case

may be.

In the Locai Government code (sec. 192),local governments may

grant tax exemptions. It is, however, significant to note that withrespect to real property taxes, no such power exists, save in the case

of condonation of taxes which can be granted only for certainjustifiable reasons which are expressly stated in the law (see

Sec. 276, Local Gouernment Code).

(fl Protectionism - In some important sectors of the economy,

as in tlTe case of foreign importations, taxes sometimes provide

( I lr)N l,lItA[, PIiINC I PLHS

rr,,l.r'l.irrr t,o lrurl industries like protective tariffs and customs,lrrlrr.tr

'l'll l'l()ltY AND BASIS oF TAXATION. There are two reasonsir lr 1' I lr. r'xcrcisr,' by the state of its taxing power is justified. one is,, r':r:irl,.v, and the other is the grant of Brotection and benefits byI lr,. I llrrl,r' 1,1; its citizens.

' (rr) ly'r,r'.:ssity Theory - Taxes proceed upon the theory that ther''',lr'rrr:t'o['government is a qecessity; that it cannot continue,: rr l,rr I I lre rneans to pay its exp?nse_-$ and that for those means, itl,r , rlr. right, to compel all citizens and property within its limits to,, r,lr rlrrrlt,(5/ Am. Jur.42).

\, , ,r'rli.g tpour supreme court, taxation is a power emanatinglr 'r, .,'(','s*i!rf It is a necessary burden to preserve the. state's,,,\. r,.'sirrtydnYa means to give the citizenry an army [o resist,,r,l,rt,,r,,r,,ni a navy to defend its shores from invasion, a corps ofqvil,,r r r irrl. l. serve, public improvements designed for the enjoyme\t,,t tlr,'r'rlrzcnry and those which come within the state's territor\'rrr,l lrr.rlities, and protection which a government is supposed to.I',,,\ r(li. Ql 'hilippine Guaranty Co., Inc. u. Commissioner of Internal/i, ,,, ,rrriJ t'l ttL., supra).

rl,t 'l'lrr llenefits-Protection Theory - According to this theory,r lr, I ll;r l. rlcrnands q]}d :eceives taxes from the subjects of taxation,, r r lr r r. r ,,lii-.iJai"tio" ro trruilt mayTe enabled to carry its mand.ateirr I , r r'l l,'r'1, irnd perform the functions of governmentl/and the citizen1',,1 , lr,,rrr his property the portion demanded in order that he may,l,: rrrr':rrrs t,hereof, be secured in the enjoyment of the benefits of., r. ,r rr r;,,'tl society. However, the foundation of the obligation to pay

r ,r 'i,' , ',, rr,l, t,he privileges enjoyed or the protection given to a citizenl,r tlr,.(lrv.rnment, although the payment of taxes gives a right toni't,', lr,r.; lroth are enjoyed as well by those members of a state,, lr,, rlrr rrot, pay taxes because they are not able to do so (51 Am.tttr l:: '1,'t).

l\lrrlr,rrver, as pointed out in the Algue, Inc. case, supra, inr '., lrr,rit' lirr the protection that the state gives to its citizens, taxesrrr,r ,t lrr.r:orrespondingly paid to it.f, ll ,,lr,rrrlcl be noted that while taxes are intended for general

1,, 111.1,qr;, spccial benefits to taxpayers are not required. Thus, theI',,rrr I lrt'lrl that from the contribution received, the Governmentr, rrrl.r'ri r, special or commensurate benefit to any particular person,,r i,r iltr'r'(..y. A tax is not imposed on the basis of a special or particular1,, r,,.lrt rrt..ruing to each citizen in proportion to the tax paid.

ril

t,AW ()t. I]ASIC TAXA'I'ION IN'I'II U I'IIILII'I'INI'S

According to the Supreme Court, a person cannot object to or resistthe payment of taxes solely because no persc,nal benefit to him can

be pointed out as arising from the tax (Lorenzo u. Posadas, etc., 64

Phil.353).In the case of Gomez u. Palomar, etc., et al. (L-23645, Oct. 29,

1988), the Supreme Court upheld the validity of the Anti-TB StampLaw (R.A. 1635) which required the affixture of a semi'postal stampon mail matter between Aug. 19 and Sept. 30 of each year. It washeld that although no special benefit accrues to mail users by such

stamp, it is not necessary, to constitute a public purpose, that specialbenefits accrue to a taxpayer; it is enough that he enjoys the benefitsof living in an organized society

gtr scoPE oF THE LEGISLATM TAXING POWER.Legislative taxing power or discretion extends to the following:

(g) the person, property, or occupation to be taxed (51 Am. Jur.172f. Excises or privileges, provided they are within the taxingjurisdiction, are also included. As stated in the case of Gomez u.

Palomar, etc., et ol., sttpra, the taxing authority can select thesubjects of taxation.

Ib) the amount or rate of the tax;

p) the purposes for which taxes shall be levied provided theyare public purposes;

(*) the kind of tax to be collected;

(eN the apportionment of the tax, i'e., whether the tax shall be

general or lirnited to a particular locality cr partly general and partlyIocal;

(fl the situs of taxation; and

(g) the method of collection''Going back to the purpose of taxation, as further elucidated by

an eminent authority, the purpose of the levy is exclusively withinthe discretion of the legislature, but courts may determine whetherthe purpose is public or not. The legislature also has full discretionas to the persons, property, occupation or business to be taxedprovided these are all within the state's territorial jurisdiction. Itcan also finally determine the amount or rate of tax, and lastly,legislative discretion atrso extends to the mode, method or kind oftax like property, excise, license, occupation or income tax (1 Cooley

176-184).

( ; I.]N URAI, PITINCII}LES

IS'I'IIF]POWT]RTOTAXTHEPOWEBTODESTBOY?\, r rrrrlrrrg t,o <-rne clecided case, the power to impose taxes,is one so

,rr,lirrrrlt'tl itr fbrce and so searching in extent so that the courts,,r,rrr.1,! vcnture to declare that it is subject to any restrictions.- l,rrtlvo., gx(:(]pt such as rest in th" d59"q!&"gllbg-Agryrity which

i.n!.r( rii(.r-r it,. No attribute of sovereifr-tffimore pervading' and at

r," r,rrrrt tltles bhe power of government affect more constantly and

i,,rr,,rrrl.ly all the relation.if Uf" than through the exactions made

rrrrrl.r rt (Churchill, et al. u. Concepeion, etc',34 Phil' 969)'

Irr ltght of the foregoing description of the toxing power' ist,t\,tltt,n, Lherefore, the power to destroy?

r ,lrrr,l'.lustice Marshail of the u.s. supreme court, in the notable

,,r,,, ,r1 Mt'Culloch u. Maryland (U'S' 4 Wheat' 316' 4 L' Ed' 579)'

r,, r, I, l,, w r r I lr(' rule that the power to !q4-14yglye! thelgggr to destrpy'

tl,, t,r rrrciple is pertinent 6nly when there it@ pory9to tax a

s,,,, L,:,rlrrr subject and has ,ro "*l"tiot'

to a case wffi6h right tor!,q i'xr:rl,s" This oft'quoted maxim instead of being regarded as a

l,l,r rr li r,l u trthorization of the unrestrained use of the taxing power

l,,r ilry rrrrd all purposes, irrespective of revenue, is more reasonably

, ,,,, ,t ,l,r,,r[ as anepigrammatic statement of the political and eeonomic

,, n.!rn I lrrrt since the financial needs of a state or nation may outrun,, , r 1' lr r r r ruln calculation, so the power to meet those needs by taxation

,ri'it rrrt. be limited even though the taxes become burdensome or

,,,r,lr:r('rt,ory. To say that "the power to tax is the power to destroy"

,, q,,,l.scriteggt tle prrpo.", for which the taxing power may be

rr,,, rl l,ttl. the d&ree oili6or with which the taxing power may be

, ,,,1,1,,yr'1I i., o.f,6" to -raise rg-v-gUue (l Cooley 179'181)'

(.()NSTITUTIoNALRESTRAINTSRE:.TAXATI0NISTHEl,t twl,llt To DESTROY." It is important to note, however, that,r Irrl,. t,rrxation is said to be the power to destroy, it is by no means

irrrlrrrrrt,trd. According to an authoritative opinion, when a legislative

l,,,ily Irrrving the power to tax a certain subject matter actually,ilrt,,,:;('s ou.I', u burdensome tax as effectually to destroy the right to

l,, i l,rrn the act or to use the property subject tothe tax' the validity,,t I lll' r,nuctment depends upon the nature and character of the rightr,, rllril,roy. If so great un ubr,r" is manifested as to destroy naturalrr I I ( I I r I rrtlamental rights which no free government couid consistently, r,,lrrtt', it is the duty of the judiciary to hold such an act, r r r,, rrrsl,itutional (Ibid').

'l'lrut, is why it can rightfully be said that while the power to tax

r', llr. llower tl destroy,"it is equally correct to postulate that the

LAW OF BASIC'I'AXATION IN'I'I I I.] PIIILIPPINh]S

"power to tax is not the power to destroy while the Supreme Courtsits," (1980 Bar question) because of the constitutional restraintsplaced on a taxing power,that violates fundamental rights.

In any other case, however, since the taxing power knows nolimits except those expressly stated in the constitution, it must followthat if a tax is within the State's lawful power, the exertion of thepower may not be judicially restrained because of the results thatmay arise from its exercise. Thus, it has been held that a federalexcise tax upon artificially colored oleomargarine may be prohibitedentirely without any violation of fundamental rights (see 51 Am.Jur. 80-81).

The Supreme Court, however, reminds us that although thepower of taxation is sometimes calied the power to destroy, in orderto maintain the general public's trust and confidence in theGovernment, this power must be used justly and not treacherously(Roxas, et aL. u. CTA, et al., L-25043, Apr. 26, t968).

Hence, where it appears that the taxpayers, in order toaccommodate the Government's program of providing land for thelandless tenants, took it upon themselves to pursue that programby subdividing a large tract of land owned by them into smaller lotsand selling them to said tenants at cost, there was no Iegal basis forthe Bureau oflnternal Revenue to consider them as being actuallyengaged in business and subjecting them to the real estate dealer'stax. Furthermore, it was held that there was also no basis to assessthe income tax as though the land sold by them was a business orordinary asset. It was further ruled that since the taxpayers wereacting only in response to the Government's desire to ameliorate,unable as it was to finance the purchase of the large tract of landfrom the taxpayers, assessing them as ifthey were actually engagedin the real estate business would run counter to the principle thatalthough taxation is the power to destroy, such power must not beused treacherously.

Taxpayers owe honesty to the Government just as theGovernment owes fairness to taxpayers (Cornmissioner of InternqlReuenue u. Tokyo Shipping Co., Ltd., etc., et al., supra). In thrscase involving a tax refund which, incidentally, is also a part of thetax spectrum, the Court, in unmistakable language, said:

"x x x Fair deal is expected by our taxpayers from theBIR and the duty demands that the BIR should refundwithout any unreasonable delay what it has erroneouslycollected. Our ruling in Boros, et al. u. CTA, et al., supra, rsapropos to recall:

10 11

( I t,)N lqRn l, l,lil Nol l,l,hls

"l'lrr' powcr of taxation is sometimes called alsoI Irr, powt,r t,o dcstroy. 'fherefore it should be exercisedwrl,lr r:rrrtLion to minimize injury to the proprietarylrlr,lrl,s of' a taxpayer. It must be exercised fairly,r,r1rr:rlly irnd uniformly, lest the tax collector kill the'lrt,rr t,hat lays the golden egg'. And, in order torrurirrl,itin the general public's trust and confidence in{lrr. (lovernment this power must be used justly andrrot, t rcilcherously."'

l'( )Wl,llt OIr JUDICIAL REVIEWIN TAXATION. In the case,,1 ( ' rrrr rtt i:;:;ion,er of Internal Reuenue u. Lingayen Gulf Electric Powerr ,, lrtr' (l ,-2377L,Aug.4, 1968), the Supreme Court ruled that courts

' ,r r m,{ rrrrluire into the wisdom of a taxing act. As opined by Judge| 'r,r,lr,r,' , r'orr rts cannot review the wisdom or advisability or expediency,,1 ir I ir x 'l'lrc judicial tribunals of the State have no concern with the

t,,,lr, 1 ol lt'gislation. The judicial power cannot Iegitimately question, , r r r I u r;r' to strnction the provisions of any law not inconsistent withllr, lrrn,lrrrrronl,al law of the State. Nor can the motives which haverr,llrr,.ncltl t,he selection of objects for taxation or determined the,rrr 1,,, rrrtluired into (/ Cooley 165-169).

'l'lr. lrot,l,om line as far as judicial non-interference is concernedr , I lr r'. As long as the legislature, in imposing a tax, does not violate,r s,;,1 r, ; r lr lt constitutional limitations or restrictions, the courts have,,, , i,.('('r'n with the wisdom or policy of the exaction, the political or,,tlr, r .,llirtcral motives behind it, the amount to be raised, or the1,, , ,,rr:r) lrroperty or other privileges to be taxed (51 Am. Jur. 77-78).

lrr, rrltrrtally, the Court's power in taxation is limited only to the,r 1, ;, 1 r, ;r l rorr and interpretation of the law. Therefore, the petitioner's,r r 1,, rrr.rrl. t.hat the affixture of the documentary stamp on freightr ',i ,.rl)lr; is irnpracticable should not be entertained because accordingt,, tlrr'(burt in a decided case, the impracticability and absurd, ,,r' (^(lucr)ces of the law should be addressed to the legislature and,r,lr rr rn rsl.rative authorities. Courts merely apply the law as they findrt 1/lr;rr-yrr Land Transportation Co., Inc. u. Collector of Internallit r,,'ttttr. 105 Phil. 1338 [Unrep.]).

'l'lrc sirme principle was stressed in another case where the Court,rrrl llr:rt it is not within its province to inquire into the wisdom of

I lr,. lr r w lirr indeed courts are bound by the words in the mouth of thel,r\\'rurfrt'r- "A uerbo legis non est recedendum" (Commissioner oft'n:;tt'nts u. Mqnila Star Ferry Inc., et al., L-31776'78, Oct. 21, 1993)'( 'r,rr r.l r; lrirve no authority to pass judgment upon the taxation policy

Tl,AW Olr IJASI(l'l'AXA'l'lON lN'l'll I,) l,l IIt,tt,l,tNt,)S

of the Government. It is inherent in the power to tax thaL the Statebe free to select the subjects of taxation, and it has been repeatedlyheld that 'inequalities which result from singling out of one particularclass for taxation, or exemption, infringe no constitutional limitation'(Commissioner of Internql Reuenue u. Santos, etc., et al., G.R.No. 119252, Aug. 18, 1997).

It is interesting to note that the principle of judicialnon-interference into questions of tax poiicy could probably extendalso into the administrative realm. In one case, the BIR in itsRevenue Memorandum Circular No. 47-91 reclassified copra as a"non-food" agricultural product, the sale of which by the primaryproducers are exempt under the value-added tax law.

The reclassification was assailed by the copra dealers contendingthat the same was counterproductive. In resolving the issue, the Courtruled that the question as to whether or not the BIR's reclassificationis counterproductive could be properly addressed to respondentsSecretary of Finance and Commissioner of Internal Revenue orCongress (Misamis Oriental Associatioru of Coconut Traders, Inc. u.Department of Finaruce Secretary, G.-R. No. 108524, Nou. 10, 1994).

ASPECTS OF TAXATION. Taxation embraces two aspects orphases. One is the levy or imposition of the tax on persons, propertyor excises; the other is the collection of the taxes already levied.Levy, whch is a legislative power, includes the determination of thepersons, property or excises to be taxed, the sum or sums to be raised,the due date thereof and the time and manner of levying andcollecting taxes.

Collection (including assessment) consists of the manner ofenforcement of the obligation on the part of those who are taxed(51 Am. Jur. 35).

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

,L. Fiscal adequacy - The sources of government revenue muslbe-sufficient to meet government expenditures and other publicneeds]TEis:-is essential in ord.er to avoid budgetary deficits and tominimize foreign and local borrowings.

A court ruling describes fiscal adequacy as one of thecharacteristics of a sound tax system which requires that sources ofrevenue must be adequate to meet government expenditures andtheir varialions (Chouez us. Ongpin, etc., et ctl. G.R. No. 76778,June 6, 1990).

t t2 0?,rnf

(i t,lN l,lltAl, l'ltlNC I l')l,lrS

. li 'l'lt|or(Lit:ul ,Justice - A good tax system must be based on thet{rrrr1,r,r"s rrtrtlity to pay. This suggests that taxation must be

1'r,,1'r r'rrsiv(| cclnformably with the constitutional mandate that,',,,,,,,,,rrr shall evolve a progressive system of taxation (Sec' 28[1]'

lrt |1, t9tl7 Constitution).

,t .,ltlrninistrq,tiue Feasibility - Taxes should be capable of beingi,ll,,r I rvcl.y cnfbrced.. Hence, it must not lay down obstacles to businessgr,,rlllr ,,,r.1

"conomic development. The value-added tax law ryAT)

r,,ulrl lx.r:il,ecl as an example of administrative simplicity. Speakingr,l tlr,, VA'1. law, the supreme court said that the law "is principallyirtlu.rl I.o rirtionalize the system of taxes on goods and services,,rlrrrl,lrly t,itx administration and make the system more equitable to

Frrrrlrlr. llre country to attain economic recovery" (Kapatiran Ng Mgat\,rliltlttrllllteJ sa Pamahaloon rtg Pilipinas, Inc., et al' u' Tan', etc',

r; li /Vrr.,\131 1, June 30, 1988 and companion cases).

'l'rr xrrt,ion could also be enhanced through the exercise of police

Iu11,,.r ll' rrnder the police power, a local government can classifyIturrl.i ir:; rcsidentiai and commercial, then, since conversion oftl,luirlr.rrrl Iands is usually aSSeSSed on a higher assessment level,

1,1 q r rrf lcr:fions are increased (see Patalinghug u. Court of Appeals,

t.t ,rl . ( i /t. No. 104786, Jan. 27, 1994).

I ;\ x A'l'tON DISTINGUISHED FROM POLICE POWER;1N I ) l,:M INENT DOMAIN\ /ir tttlion u. Police Power

. L'l:; t,o Purpose - Taxation is levied for the purpose of raisingI r , \.r,il il ( .; 1rt-rlice power is exercised to promote public welfare through1, ;,,rlrrl tttlls.

7, ,'ls tct Amount of Exaction - In taxation there is no limit; ingil,lrr.r. l)ower, the exaciion should only be such as to cover the cost of

1 r,grrr lrr(,iotr, issuance of the"license or surveillance'

._ :t ils to Benefits Receiued, - In taxation, no special or direct benefit

t;r |,rr'('rV()d by the taxpayer other than the fact that the Government,,il1y rrr,r:urer to th".itir"n that general benefit resulting from the

1,1,,1,', lirrn <rf his person and property and welfare of all (51 Am'Irtr l:l 4:l). As to police power, however, while no direct benefits

,itr. I.r.(.(,iv()d, a healthy economic standard of society known as't!ttut nrt ttt ubsque injuria" is attained.

.l ,'l.s lo Non-Impairmen't of Con,tracts - In taxation, ther,,i,, ,,,,1,,,irrnent of contracts rule subsislS: "h3"-tuxing

ac[ cannot

i r r r ;, i r r I i l r c obligation of contra itr ( 5"c. l O,, A,t IIL Iy, Constitution)'

,f ..i.

13 l.. it

['l,AW Ol,' llAslC'|'AXA1'ION lN'l'lll, l)l lll,ltrl,t Nl,)S

In the exercise of police power, however, t,his limitation does notapplv.

5. As to Transfer of Property Rights - In taxatio.r, taxes paidbecome part of the public funds; in police power, no transfer, butonly restraint on the exercise, of property rights exists.

B. Taxation, u. Eminent Domain7. As to Nature of the Power Exercised - Taxation is exercised in

order to raise public revenue; eminent domain or expropriation isthe taking of private property for public use.

2. As to Compensation Receiued - In taxation, payment of taxesresults in the general benefit of all citizens and inhabitants of aState;in eminent domain, a direct benefit results in the form of justcompensation to the property owner.

3. As to Noru-Impairment of Contracts - In taxation, a contractmay not be impaired; this is not so in eminent domain.

4. As to Persons Affected - Taxation applies to all persons,property and excises that may be subject thereto; in eminent domain,only a particular property is comprehended.

TAXES DISTINGUISHED FROM OTHER IMPOSITIONS

l. Toll - ToIl is a demand of ownership * an amount charged forthe cost and maintenance of the property used/tax is a demand ofsovereignty for the purpose of raising public .5u"n.,". f t should benoted that the Local Government Code authorizes thd collection oftolls by local government units for the use of any public road, pier orwharf, waterway, bridge, ferry or telecommunication system fundedand constructed by them (Sec. 155, Local Gouernment Code).

2. Penalty - Tax is a civil liabiiity. A person is criminally liablein taxation only because he fails to sptisfy his civil obligation to paytaxes (Republic u. Patanao, supra)1On the other hand, penalty is apunishment for the commission of a crime.

Incidentally, in the case of National Deuelopment Company u.Commissioner of Internul Reuenue (G.R. No. 53961, June 30, 1987),the Supreme Court ruled that if a withholding agent like NDC failsto withhold the requisite withholding tax on the income receivedfrom Philippine sources by a Japanese non-resident foreigncorporation, such withholding agent (NDC) is liable to pay the taxthat it did not withhold as a "penalty" for its failure to withhold thetax of the foreign corporation (see also Sec. 251, 1997 NIRC).

L4 t5

( I I,lN l')ltAL l'ltl N()l l.'l,lrs

I rr lrr xirt;ion, there are so-called civil or administrative penaltiesItl,,, llrr, 2l-r(Zr strrcharge for failure to pay the deficiency tax withintll. lrrrrr' prescribed for its payment in the notice of assessment, orl,rrlrrll l,o pay the fuII or part of the amount shown on any returnl,,tun'r'rl l,o be filed under the provisions of the Tax Code or rules,rrrrl lr,lirrlations, or the full amount of tax due for which no return isr ,,,1r r r rt,rl t.o be filed, on or before the date prescribed for its paymentf i.r :t.1,\l3l and [a], 1997 NIRC).

'.1 ('ornpromise or compromise penalty - This is neither aninr;',rrrl,iou nor a penalty, but it is an amount that is collected as ar,rrrpr,nrise in cases involving ylglglig-Os of the Tax Code, rules or1,,11 rrlrrl.ions. A compromise penalty cannot be imposed by theI ,,runrr:isioner (Collector of Interrual Reuenue v. Uniuersity of Sto.l't,nttt:;, tl. al., 104 Phil. 1062 [Unrep.]).It a taxpayer refuses to paytli',,r,nrpromise, criminal action is the remedy.

,\lllrough compromise penalties cannot be IegaIIy imposed,| illtrrr trr'l I'i.neda u. Collector, CTA Case No. 364, Nou. 19, 1963), theylr,r\. lr()wever, be collected if the taxpayer has expressed his,: r I I r r r li r rt.ss to pay the same. Hence, in connection with the taxpayer'srr g'1,r,rr I irr Lhe CTA, said court may sentence the taxpayer to pay the,,,irt,r'i)urise penalties agreed to by him as part of the judgmentlr ,,rrurussioner of Internal Reuenue u. Guerrero, L-19074, Jan. 31,I'll, t )

I '\1tct:ial Assessment - A special assessment (1) is levied onlynrr lrrrrrl, unlike a tax which is imposed on persons, property and,: e, r,i,.: r, ( 2) cannot be made a personal liability of the person assessed;r lt ru lrrrscd wholly on benefit; and, (4) is exceptional both as to timearr,f 1.,'rrlity (1 Cooley 107-108).

llrrr,'r,special assessments are not taxes within the constitutional,,r ,rlrrlrrl,ory provisions on tax exemptions, it follows that the!.c,,urplion under Sec. 28(3), Art. VI of the Constitution does notqlrIl 1' I r, sllecial assessments.

'l'1r,, r:onstitutional exemption granted under the aforecitedlr i , \'r1r(,n oI the Constitution covers charitable institutions, churches,,lr,l lrir rirollages or convents appurtenant thereto, mosques, non-profit1,1rs111rl1r1i1ve, and all lands, buildings and improvements actually, directlysrrrl t,xt:ltrsively used for religious, charitable or educational purposes.

ll rrr important to note, however, that under the proviso to!i.r li lO o1'the Local Government Code, special assessments (or':1,,,, rr I lt,vics) do not apply to properties exempt from the basic reallrrrrlrr,r'l.y t,rrx under Sec. 234, aLso of the Local Government Code.\ 111,rrli ( lrc properties which are tax-exempt under Sec. 234 are the

Tl,AW Ol,' ltASl()'l'AxA1'l0N IN'l',ll l,l l'llll,ll'l'lNI'ls

properties mentioned in the above-cited provision of the Constitutiol.It would seem, therefore, that in view of the exempting proviso inSec. 240 of the Local Government Code, properties which areactuaily, directly and exclusively used for religious, charitable andeducational purposes are not oniy exempt from real property taxesbut are exempt from the imposition of special assessments as well'

The nature of special assessments can be better understood inlight of Sec. 240 of the Local Government Code, the pertinent portionof which reads as follows: "A province, city, or municipality mayimpose a special levy on the lands comprised within its territorialjurisdiction specially benefited by the public works projects orimprovements funded by the local government unit concerned;Prouid.ed, howeuer, That the special levy shall not exceed sixty percent (60%) of the actual cost of such projects and improvements,including the costs of acquiring land and such other real property inconnection therewith. x x x"

5. License Fee

(a) A tax is levied in the exercise of the taxing power; Iicense fee

emanates from the police power of the State. It has been ruled thatregulation and taxation aie two different things, the first being anexercise of the police porvYer, whereas the latter is not (Serafica u.

Trecrsurer of Ormoc City, et al., L-24813, Apr.28, 1969).

(b) The purpose ofa tax is to generate revenue; whereas a licensefee is regulatory (Victorias Milline Co., Inc. u. Municipality ofVictorias, Negros Occidental, L'21183, Sept.27 1968).

(c) The amount of the exaction or charge, if it is to be a licensefee, must only be of a sufficient amount to include expenses of(1) issuing the license; and, (2) cost ofnecessary inspection or police

surveillance (Cuunjieng u. Patstone,42 Phil.818; City of lloilo u.

Villanueua, et ql., 105 Phil' 337).

In this connection, it was ruled that where a permit collectedfrom alien job applicants is in excess of the cost of regulation, theexaction is a tax (Yillegas u. Hiu Chiong Tsa.i Pao Ho, et al', L-29646,Nou. 10, 1975).Incidentally, exemption from tax does not includebuiiding permit fee and special assessments (Apostolic Prefect of theMountain Prouince u. City Treasurer of Baguio, 71 Phil. 547) astheseare not taxes but regulatory fees in the case of the license fee, andIevy on account ofbenefits to land for the special assessments.

In one case, the Supreme Court said that if the purpose isprimarily revenue or if revenue is at least one of the real andsubstantial purposes, then the exaction is a tax#ence, the Court

I 161?

( I I,lN l,lllAl, l'll,l N(ll t'l,FlSi

l,' l,l rlr,rl rrrol,or vclricle registration fees are taxes because theli,pr.,lrrlrvr.rrrt,r'nt, is urainly to raise funds for the construction andiri,,rrti urrrr:r,ol lrighways and, to a much lesser degree, to pay for1lq, , r t,,.ilir(,ri ol't,he l,and Trasportation Office, a regulatory agency.t rl,, ( l.vtrn tlt'nl, (Ph,ilippine Airl,ines, Inc. u. Edu, etc., et al.,i I t ;', ;. .ltt1i. 15, 1988). It should he noted that the ruling int,.1 t,t,tr, r, I'ltilippin,e Rabbit Bus Lines, Inc. (L-26862, Mar. 30,r,r,rr r,,llr,,t,l'lcr:t,t,hatmoLorvehicleregistrationfeesarenottaxesl,rrr t, r lr:rr lrccn superseded by said decision.

ll,,rr,.r'r.r', it, should be noted that in the case of license fees for,t.r, ,r ., lrrl or:r:rrpations," the exaction may be very large without

,, rlr lr.irr14 a tax. This is so because under the general welfare1,,,, , rrrrrrrrt ilral corporations are authorized to enact ordinances

r, g,r, r,l,. lirr t,lre health and safel,y and to promote the rnorality,1., ,', ,,rrrl llt,rrcrai welfare of its inhabitants (Physical Therapy|'|,. , tt ,tttt)tt ol Lh.ePhilippines, Inc.u.MunicipalBoardaf theCity

tl.,'ril,t, l0l llh,il. 1142).

I l, r , , li rrrrls of licenses are recogrtized in the law: (1) Iicenses forrtr, r,r,rrlrrlron of useful occr.tpations; (2) licenses for the regulation.r |, Ltr r( lr)n of non-useful occupations or enterprises; and,r ir lr,, rr r':; ltll'feVenUe Only.

I I r r r.i t,worthy that non-payment of a license fee for a business:,r,r l, ' tlr;rl lrrrsiness illegal. Howevet:, non-payment of a tax for at,,r , ,, rl,r'si not necessarily make that business illegal althoughr t, r ,,, ,1' lr I lrt' a ground for criminal prosecution against the personi t., , !,r, , r,ioltrting the law.

I ,rr I lrr.r'urore, not only businesses rn'hich are lawfully conductedi ,. rlrli l,lven -those businesses lvhich are carried on itr.legaliy

1,. rrl,1,,, t lo Lax. For exampie, the'value-added tax (VA?) may be,l ,n t,he illicit production and sale of cassette tapes. Tax

i, , r,,( rls rnay even extend to the income that is realized fromrl,, ,,1,.,,1 llrcse tapes because income from illegal sources is alsor.,.,,1'1,,

it r rrrlr,r'r'sting bo note that under the Local Government Code,,,,,r,,r, rt,;rlr(rt's (and cities) are authorized to impose regulatory fees'

I Ii ,rl r;rrid Code provides that municipaiities may impose and,,11, , I ,rr, lr rcasonable fees and charges on business and occupation,

,irr,I rr ri r.pl irr the case of the professional tax) on the practice of anyt,,,,1, r,rn ()r' caliing commensurate wit]r the cost of regulation,i,, r,,, tr'), ;rrrrl licensing before any person may enpia€ie in suchi,,r rr,, ,rr.()(rcllpation. or practice o{'such profession or callingir I l!,1. Lttr:ol, Gauerrumen.t Code).

r t,n w olf liASlc,l'AxA,lloN lN,t'llH t,Illl,ll,l,lNl,)s

A long line of decisions has held that to be valid, an ordinancemust conform to the following substantive requirements: (1) It mustnot contravene the constitution or any statute; (2) It must not beunfair or oppressive; (3) It must not be partial or discriminatory;(4) It must not prohibit, but may regulate, trade; (b) It must begeneral and consistent with public policy; and, (6) It must not beunreasonable (Magtajas, et al. u. Pryce Properties Corp., Inc., et al.,G.ft. No. 111097, July 20, 1994).

6. Margin Fee - This is not a tax but a currency measuredesigned to stabilize the currency such as the exailioEbr-a certEinfee under R.A. 2069 on the remittance of profits earned. in thiscountry (Esso Stand,o,rd, Eastern, Inc. u. Commissioruer of InternalReueruu.e, L.28508-09, July 7, 1g8g).

7. Debt - A tax is not a debt because it is not an obligation thatis created by contract, express or implied. A tax is an obligationimposed by law. It, therefore, follows that if a taxpayer fails orrefuses to pay a local tax on tenements or apartments, he is liablefor criminal prosecution. He cannot plead immunity from criminalIiability under the constitutional provision which states that "noperson shall be imprisoned for non-payment of a debt or poll tax',(Sec. 2A, Art. III, 1987 Constitution.;see also Villanueua u. City ofIloilo, L-26521, Dec. 28, 1965).

Inasmuch as taxes are not debts, it follows also that the twoobligations are not susceptible to set-off or compensation underArt. 7279 of the Civil Code. In the case of Republic u. MombulaoLumber Company (L-17725, Feb. 28, 1962), the Supreme Courtcategorically ruled that taxes are not subject to set-off orcompensation.

In another case (Francia u. Intermediate Appellate Court, G.R.No. 67649,,{une 26, 1988), the Court also held that no compensationis legally authorized where it appears that the parties involved arenot creditors and debtors of each other (see Art. l2Tg, Ciuil Cod.e).In that case, what was sought to be set off against the taxpayer,sreal estate tax liability to the City of Pasay was the amount of moneythat he (the taxpayer) was supposed to receive as payment for hisproperty that was expropriated by the National Government. TheCourt applied the Mombuloo ruling.

A corporation's outstanding claims for reimbursement againstthe oil Price stabilization Fund (oPSF) cannot be offset againstits contributions to said fund. P.D. 19b6, as amended by E.O. 1BZ,explicitly provides that the source of the oPSF is taxation. A taxpayermay not offset taxes due from claims that he may have against the

L 18 19

( I llN l,lltAL 1) ltl NC tI']l,ltlS

I {rrr.r rrrrrrrrrt, ((]oll cr Philippines, Inc' u' Commission on Audit'nttt,ttt) 'l'ttxcs and debts cannot be the subject of compensation

1,,,, irill1t, l,he Oovernment and the taxpayer are not mutually creditorS

,ilr, I, l,,l rl ors ol' cach other and a claim for taxes is not a debt, demand,

r rrnlr '('l rrr iudgment as is allowable to be set oft (Ibid")'

It l$ interesting to note in this connection that although taxes.,,, vrrrl tlcbt.s, tlie ruling in one decided case holds that a tax may

lrir r I ir I r' ol' t,hc nature of a debt. For a clearer understanding of taxes

,irIl ,l,.lr(.s rrncl the ruling itself, the following excerpt is quoted, thus:

,,,l,here is a material and fundamental distinction between

;r I rr x ir ttd a debt (Meriwhether u' Garret, 102 U'S' 427)' Debts,rr,' rlttt' t,cr the Government in its corporate capacity' whileIrrrt's rlre due to the Government in its sovereign capacity',\ rlobt, is a sum of money due upon contract, express or

rrrrpliotl, or one which is evidenced by judgment' Taxes are

rrrrlrost,s ievied by the Government for its support or some

',;r,'r'i:rl prrpo"", which the Government has recognized'

li,,*,'r.rr, tax in a broad sense may be a debt, so that interest.rr cst,ute and inheritance taxes may be deducted as interest,,rr irrtlcbtedness" (Commissioner of In'ternal Reuenue u'

I',tlrrrr,<:a, Jr., L'16626, Oct. 29, 1966 citing Camden u' Finch( irrrlc and Coke Co', 61 ALR 584)'

'l'lr:rt, portion in the abovecited ruling which speaks of the

rlstlrr.trbiiity of interest on taxes should be carefully analyzed. This

r1r1r.,rlrrrn nray be asked: In, light of the existing law, can it be said'

tlt,rl rrr trLL cases, interest on, taxes may be deducted? The answer to

tlrr,, ,1rrt'sl,ion should be qualified. As regards interest on taxes that,r r I r r0I tronnected with the taxpayer's profession, trade or business'

rr ,t,,.nrsi that deduction is not allowed.

'l'lu,'r is so because Sec.29(b)(1) (now, Sec' ?a[B][1] of the Tax

t ,,,lt rtf' lggf),on the deduction of interest, speaks only of the "amount

,,1 rrrlr,rt'ct paid or incurred. within a taxal:Ie year on indebtedness

rirt ilr.r.(,(l in connection with the taxpayer's prOfession, trade Or

Irlt !tll{'S$ X X X."

ll, st:ems, however, that under existing law even in the case of

, rtr,,,r,1rj or resident aliens who are self-employed (persons who are

, rrgirrlit'tl in business and those who practice their profession in the

t,t,, t,1'f ines), the deductibility of interest on indebtedness is limited,,rrly lo interest paid or incurred within a taxable year on loans

,,,rrirrrr:t.cd from accredited financial institutions which must be

lrrr,\,r,n t,o have been incurred in connection with the conduct of a

I rr t ;rir.yoI''s profession, trade or business'

l,AW Olr lJAtil()'lAXAl'lON lN'l'll l,) I'ltl l,l['l,lNl,]S

Considering the above observations, thcrclbre, iL would seern thut,in the case of individuals, deductibility of interest on taxes is noIonger authorized if those taxes are not in any way connected witlrprofession, trade or business. Hence, if, for example an individualtaxpayer incurs a liability for the payment of, or actually pays,interest on his personal income tax or on donor's gift tax, thededuction is not authorized.

How about corporations and taxable partnershlps? Appiying theaforecited Sec. 29(b)(1) (now, Sec. 3a[B][1], 1997 NIRC), it wouldseem that deduction ofinterest on taxes is legallyjustified providedthat the taxes paid or incurred are in connection with the taxpayer'strade or business.

.t It is significant to note that in the case of Domirugo, etc. u.

Gq,rlitos, etc. (L-18994, June 29, 1963), the ruling seems to deviatefrom the principle that taxes and debts cannot be compensatedagainst each other. In that case, what appeared to be a due anddemandable debt of the Goyernment to the estate of the late WalterScott Price (as payment for the latter's services), was allowed as aset-off against the transfer taxes due from the decedent's estate.The Court opined that when two obligations are both due anddemandable and all the requisites for a valid compensation arepresent, compensation of the two obligations takes effect by operationof law (citing Arts. 1279 and 1290, Ciuil Code).

* May the taxpayer, howeuer, set off his pen.d.ing unapproued,refund of a tax for a preceding year again.st his tctx liability for asubsequent year? Formerly, under the oid provisions of Sec. 51(d) ofthe Tax Code, the set-off was legally possible. As a matter of fact, inthe case of Comm.issioner of Internal Reuenue_u,JJSE9n.S.uyae Mines,Inc., et al. 1L,ZSZO9, July Zg, tg6$;tEe ruling was to the efTect thata pending claim for refund may be set off against an existing taxliability even though the refund has not yet been approved by theCommissioner.

In light of the present Tax Code, which contains no similarprovision upon which the ltogon-Suyoc ruling was based, it isdoubtful whether a pending claim for refund may still be appiiedagainst an existing tax liability.

,tq f The matter has now been settledin Philex Mini,ng Corporation

il,rrl u. Commissioner of Internal Reuen,ue, et q,l. (G.R. No. 125704,il Aug. 28, 1998) where the Supreme Court categorically held that -

"x x x Philex's reliance on our holding tn Comruissionerof Internal. Reuenue u. Itogon,-Suyoc Mines, Irtc., wherein weruled that a pending refund may be set off against an existrng

I' on 27

( i IIN UITNI, PIiI NCI I'I,US

t,r, Irrrlrilit,y evon though the refund has not yet been approvedl,r llr,, (lornrnissioner, is no longer with any support in.rlirlrtl,rry luw.

ll is irnportant to note that the premise of our ruling intlr,. rrlirretrrcntioned case was anchored on Section 51(d) oftlr,, [r]rrl,ionill Internal Revenue Code of 1939. However, whentlr' N;rlional Internal Revenue Code of 1977 was enacted,t lri, rn n rr, llrovision upon which the ltogon'-Suyoc pronouncement,r',r'' l,;uic([ was omitted. Accordingly, the doctrine enunciated111 l1,,1ytrr.-Suyoc cannot be invoked by Philex."

fll,tt, rtn (xl:ess payment of quarterly corporate income tax fortlr, y,r,.,','rli,rr.g taxq,ble year be automatically credited or appliedtt1t rtt'it lltc corporation's estimated quarterly income tax liobilities!rt1 ,llt, t,t \ttl,le quarters of the succeeding taxq.ble year?

-i' rl lrr'r ,lu(,stion may be answered in the negative. In the case of

{ F*i, ,,, ,',r,1,,:; Milling Co., Inc. u. Commissionei of Internal Reuenue,

F et ,,1 rtl lt No. 103379, Nov. 23, 1993), the Supreme Court ruled as

lrill,,'r", 'll is difficult to see by what ratiocination petitioner insists,rh llr,' lrl.r'rir.I interpretation of the word 'automatic.' Such literallrrtr r1rr,,1;rlion has been discussed and precluded by the respondent,rrrrt 1" \s decision of 23 December 1991 where, as aforestated, it+rrl, ,l ll',rL\'once a taxpayer opts for either a refund or the automaticf ,1 a r lr.rlrl scheme and signified his option in accordance with the*:.pr1f ,1lr,,rr, t,his does not ipso facto confer on him the right to avail,rl i lr,,,rrnl immediately. xxx' Prior approvalbythe Commissioner,rl lrrlr rrr;rl llevenue of the tax credit under then Section 86 x x xcr.rlrl :rlrt)r,ar to be the more reasonable interpretation to be giventr, ,,irrrl :r,,cl,ion. An opportunity must be given the internal revenuel,i,rl, l, ,rl (,he government to investigate and confirm the veracity of| 1r,,, I ir r nr ri of' the taxpayer.' x x x (I)nsofar as the option of tax credit+- , ,tr ,.r'n(r(1, this right should not be construed as an absolute right+ lrr, lr r,; rrvirilable to the taxpayer at his sole option. x x x" Automaticr l.rIrI r:r nol trvailable, but this does not mean that petitioner cannots.:,.t ;r r,.lrrnd or credit of the excess quarterly payment.

ll ttl tlt,e "non-automatic crediting" rulin,g in the Sq.n Carlostrltllttrsi,'ttsc, howeuer, apply to indiuiduals who, under Sec. 67 (now,'rr r i I rtl t,h.e Tax Code of 1997), &re required to file quarterly returnsttl titt t,ntt' l.ax on o cumulatiue bq,sis?

'l'lr,' rrnswer to this question would seem to be in the negative',\,, ,,r,lrrr1; t,o Revenue Regulations No. ?-93, any excess of the totalrlrrrrr l.r'ly payments and taxes withheld over the income tax computedlt I lr, l'r rrrr I incomp tax return may be applied as a credit against the

LAW OF BASIC TAXATION IN THII PHILIPPINEg

quarterly income tax liabilities for the taxable quarters of timmediately succeeding year. This is available to individuars wdesire not to await anymore the processing of any tax refund. to whiihey are entitled.

In case the payments credited are not completely utilized otapplied in the taxable quarters of the immediately succeeding yearbhe remaining amount shall be claimed as refund or credit bytaxpayer pursuant to Sec. 204 of the Tax Code (see Sec. i, Reu. RegNo. 7-93).

It should be noted, however, that in the aforecited. case,was no taxable income, but instead, there was a net loss inimmediately succeeding taxable year of the corporation against wthe application was sought to be made.

Under Sec. 76 of the Tax Code of 1g77, in case the corporation !entitled to a tax credit or refund of the excess estimated quarterincome taxes paid, the excess amount shown on its final adjustmerreturn may be carried over and credited against the estimaquarterly tax liabilities for the taxabie quarters of the succeedindtaxable year. Once the option to carry-over and apply the excesiquarterly income tax against ihcome tax due for taxable quarters o:the succeeding taxable years has been made, such option shall beconsidered irrevocable for that taxable period and no applicationcash refund or issuance of a tax credit certificate shall be allowtherefor.

8. Regulo.tory fees - May q,n exaction be both a tatc as well asregulatory fee? Tt would seem that this is possible, as in the caseIicense taxes. Incidentally, a law iike P.D. 198T which regulates thvideogram industry may validly impose a tax of B0% on the greceipts of videogram operators. In the case of Tio u. VideogramRegulatory Board, et al. (G.R. No. 75692, June 18, 1g8Z), it was heldthat the provisions of sec. 26 of the constitution which requires thaevery bill must contain only one subject which must be expressed inthe title thereof is not violated.

In Philippine Educational Publishers Association, Inc., et al. u.De Ocampo, etc., et ol. (G.R. No. 115981, Oct. 80, lggb), the Courtexplained that unlike an ordinary tax, a license tax is mainly forregulation. Hence, according to the Court, its imposition on the pressis unconstitutional because it lays a prior restraint on the exerciseof its right.

9. Subsidy - A subsidy is a legislative grant of money in aid of aprivate enterprise deemed to promote the public welfare. It is not atax althoirgh it may be necessary to raise the money to pay the

22

Bluploe of direct taxes.

23

OENERAL PRINCIPLES

lrly lrv rlrtl&ns of a tax (1 Cooley 77). Subsidies are sometimesl irt licu of tax exemptions,

ll1, (iustoms duties and fees' These are duties charged upon

orlitios on their being imported into or exported from a country€hHlsy 73). Customs duties are taxes, but a tax is a broader termlarrludo not only customs duties but other taxes as well. Customs

trtr rogulatory imposts on goods'

11, lleuenue - This is a broad term thai includes not only taxes

lnCurne from other sources as well. Internal revenue refers tot ut,h0r than duties on imports or exports in the nature of excise

auilh as taxes on tobacco, Iiquor, etc. (1 Cooley 75)-

l\, 'l'ribute - It has been said that tribute is synonymous withnl'nxation implies tribute from the governed to some form of

telgnty (1 Cooley 78).

lll, Irrupost - In its general sense' it signifies any tax, tribute or

r, Irr its limited sense, it means a duty on imported goods andIrntrrlise (1 Cooley 75).

BH CLASSIFIED

r 1, l'ersanal ?or - Also known as "capitation" or "poIl" taxes,nro baxes of a fixed amount upon all persons of a certain class

{klrle, however, the residence tax is now kn'own as "eoffii[runityMure on this tax will be discussed in the chapter on local

ilstt.

iitl,t,r [he jurisd.iction of the taxing power without regard to the

i#srrrrl, ()f their property, or the occupations or businesses in which

ftly rr,uy be engaged. Before the effectivity of the Local Governmentp6,iu, 1,,,.ronal tax was exemplified by the basic residence tax' Under

I lrrgperiy tax and additional levies on real property except special

i$lmrn,:nts under the Local Government Code. More on these taxes

*llt t u tahen up in the chapter on real property taxation'

l|. Direct ?or - D,irect taxes are taxes whereiR both the incidence

t, l'roperty Tax '' Property tax-es are taxe's aesessed on allor all prop,erty'of a eertain class within the jurisdiction ofg power '(/ Cooley 1 1 8). An example of property tax is the

llability forthe paymeht of the tax as well as the impact orlg of the tax falls on the same persan. An example of this tax isro tax where the person subject to tax cannot shift the burden

Jl Uru tux to another person. Estate and donor's gift taxes are other

I

l,AW Ot,. llASl(),l,AXA't'toN IN .l,l,,l I,IllLll)l,tNl,l.S

4. In,direct zor - Indirect taxes are t,axes wherein the incid.enceof or the liability for the payment of the tax fals o" or" f""ron, butthe burden thereof can be shifted or passed on to anoth". pu"rorr.

The sales tax, now the value-added tax (VAT), is an exampie ofan indirect tax. VAT is payable by any person who, in the course oftrade or business, sells, barters, u*.hurrg", o" luu"u, goods orproperties, renders services, and any person who imports goods. Asan indirect tax, the burden-of paying the amount of tfr" ir" may beshifted or passed on to the buyer, trinsferee or ressee of the goods,properties or services (Sec. 105, lggf NIRC)

_ Incidentally, w_hen the seller passes oru the tax to his customer, ishe going against the principre tiat tqxes,re personar tiabilities thepayment of which cq.nnot be transferred to aruother person? No, he]s not going against the rule. when the serler puuul, on the tax tohis buver, he is only shifting the tax burd.en lnot tt e liability to payit) to the purchaser as part of the cost of the goods

"ord ol servicesrendered.

The nature of the indirect tax, as exemplified by the sales tax,has been discussed by the supreme court in the case of ph,ippineAcetylerue co., Inc. u. commissioner of Internal Reuenue, et al.(L-19707, Aug. 17, 1987). According to the court, the sales tax thatis passed on to the purchaser as part of the p;.h;;;.i"u or tnucommodity is a tax on the seller, and not the buyer. Hlrrce, if thebuyer happens to be tax-exempt, the seiler is nonetheless liabre forthe payment of the tax as the same is a tax not on the buyer himselfbut is actually a tax on the seller.

_In a case, however, where the transaction in itself is tax-exemptan-d the buyer pays the tax as part of the purchar" p"1.", it is theseller's obligation, in case he has obtained a refund oi the disputedtax, to hold such refunded tax in trust for the buyer (Coikctor ofInterrual Reuenue u. Americqn Rubber Co., et

"t., i lOS6i, Apr. 50,

I e6s).

- Despite his right to shift, however, the seller may erect to absorbthe tax himself (Maceda u. Macaraig, Jr., etc., et at., G.R. No. gg2gl,May 31, 1991).

where, under an executive agreement between the philippinesand a specialized agency of the united Naticns like the world HealthOrganization (WHO), the contractee (WHO) in a corstructioncontract is designated as the tax-exempt party as where suchagreement provides that said contractee is exempi from all indirecttaxes, the contractor under the said contract is actualry the personwho is tax-exempt as the clear intention of the executivl ugru"-"rt

24 25

( I I'N T' ITAL PII,INCII'L!]S

' t,, lr,rrt,['it. lhe contractee who will no longer shoulder the burden,,t tlr,.r'onLrucLor's tax which contractors usual'Iy shift or pass on torlr,,rr r'ust,orners and clients (Commissioner of In'ternal Reuenue u.

t',ltrt (iolnmco a,nd Son.s, In,c., et al., L-31092, Feb. 27, 1987).

Irr llrc above situation, it should be borne in mind that the ruierlrirt lrrx cxemptions are personal to the grantee is not violatedl,i, rrrri(, t,he overriding intention of the contracting parties is to, i''url)l t,he contractor for the benefit of the contractee.

ll,,trt ubout if the buyer himself is the one exempt, would he thent,, , rt t r tl,cd to cloim for refund of the tax that the seller might haue

t,,t , .t'rl on. to |tim? Inasmuch as an indirect tax, iike the sales tax or\ \'l', lioes on to the buyer not as a tax, but only as a component ofr l, ' t) r r rt:hase price, it may be assurned that the buyer has no right torrlrl ;r rn lrrry refund.

llrrwover, if what is covered by the tax exemption grant are,,' L'(,(:t, l,axes which sellers of goods and services usually pass on tot lr, rr r:rrstomers, then it may be said that there is a valid reason for,, l l,,w r rrg the refund,

'l'lrrrs, in the case of Macedau. Macaraig, Jt., etc., et al-, suprQ.,

rlr,,(lourt ruied that the National Power Corporation (NPC), a1..r i.r'nrnerlt controlled corporation, could justifiably claim for the, I rrrrrl of the tax on petroleum products that it had purchased from,, \,{'r'aI oil companies, where it appears that under a number of tax, ,,, nr t)t,ion laws and presidential decrees enacted for said entity, its, r,,rnl)tion from the payment of said taxes was clearly shown.

l,'or instance, the tax exemption grants to NPC mentioned NPC,, lrr,ing "x x x exempt from aII taxes, duties, fees, imposts and ali,,tlr,,r'charges imposed x x x on all petroleum products used by the,,,r1roration," or that NPC's exemption includes those imposed,lrrr,ct,Iy and indirectly," or when said grant stated that NPC's

, \,'nrption covers "all forms of taxes, duties, fees, imposts, etc."

Analyzing the Court's decision in the abovecited case, the severalLr x t'x€rlption grants in favor of NPC all point to only one thing:rir;r( the legislative intent is to grant immunity to NPC from the taxt lrrrt. oil companies invariably pass on to their buyers'

ln other words, NPC's exemption herein is from the payment ofr r r, I i rect taxes - something which is quite different, for instance, fromI lr(, cxemption from taxes for which the grantee is directly Iiable.

It should be remembered in this connection that the liability fortlrc payment of the indirect tax lies with the seller of the goods or'r.r'vices only, not the buyer thereof. Hence, it is important to find

LAW Ot,' BAtil(i'l'nx^'l'l()N I N't't I l,) I,l ll l,ll,l,lNL.ls

out if the tax exemption grantcd t,o a t,axpir.ycr specifically includesthe indirect tax which is shifted to him as pa rL of the purchase price;otherwise, iL is reasonable to assume that the tax exemption shouldembrace only those taxes for which the buyer is directly liable.

Summarizing all possible situations involving indirect taxes, thefollowing points are worthy of note:

(a) When the consumer or end-user of a manufactured productis tax-exempt, such exemption covers only those taxes for which suchconsumer or end-user is directly liable. Indirect taxes are notincluded. Hence, the manufacturer cannot claim exemption fromthe payrnent of sales tax; neither can the consumer or buyer of theproduct demand the refund of the tax that the manufacturer mighthave passed on to him (Plr,ilippine Acetylerue Co. case, supra).

(b) When the transaction itself is the one that is tax-exempt,but through error the seller pays the tax and shifts the same to thebuyer, the seller gets the refund, but must hotd it in trust for thebuyer (American Rubber Co. case, supra).

(c) Where the exemption from indirect tax is given to thecontractee, but the evident intention is to exempt the contractor sothat such contractor may no longer shift or pass on any tax to thecontractee, the contractor may claim tax exemption on thetransaction (Gotamco case, supra).

(d) When the law granting tax exemption specifically includesindirect taxes or when it is clearly manifest therein that thelegislative intention to exempt embraces indirect taxes, then thebuyer of the product or service sold has a right to be reimbursed theamount of the taxes that the sellers passed on to him (Maceda u.

Macaraig, Jr., etc., et al., supra).

In,cidentally, why is this particular tq,x known q.s arl "indirecttax?" It is called as such because the one who actually pays the tax(as part of the purchase price of the commodity or service) is thepurchaser. The purchaser, in the other words, is "indirectly" payingthe tax.

5. Excise Tax - Excise or privilege taxes are laid upon themanufacture, sale, or consumption of commodities within thecountry; upon licenses to pursue certain occupations and uponcorporate privileges (1 Cooley 127).

6. Gerueral Tax - General taxes are taxes levied for the gcineralor ordinary purposes of the Government (1 Coaley 142). Exarnplesof these are internal reventre taxes, the collection of which is trtilizedfor the general expenditures of the Government.

26 27

( I l,lNI,lltAL l'ltlN(lll'1,lls

7. SpeciaL Tax - Special taxes are taxes levied for speciall)rrrl)oses, such as the additional 1%o real estate tax levied under R.A.1,.147 (now, Sec. 235, Local Gouernment Code) for the benefit of theprrblic school system.

'lhe Constitution provides that "(a)ll money collected on any taxlr,vied for a special purpose shall be treated as a special fund andp;rid out for such purpose oniy. If the purpose for which a speciallrrnd was created has been fulfilled or abandoned, the balance, if,rrry shall be transferred to the generai funds of the Government"1Scc. 29[3], Art. VI, 1987 Constitution).

8. Specific ?or - This is a tax which imposes a specific sum byI lro head or number or by sorne standard of weight or measurementrr ntl which requires no assessment beyond a listing and classificationrrf'the subject to be taxed (1 Cooley 143). Specific taxes on alcohol,Iobacco, etc., products are called excise taxes (Title VI, 1997 NIRC).

g" Ad Velorem Tax - An ad ualorem tax is a tax upon the valuerr('the article or thing subject to taxation. An example of an aduulorem lor is the real property tax.

tO. Customs Duties - The word "duty" is sometimes used in a

gcneral sense as synonymous with "tax." Customs duties are dutiesr:harged upon the commodities on their being imported into orcxported from a country (1 Cooley 73).

\1. Notional Tax - National taxes are taxes levied by the National(,lovernment. Sec. 6, Art. X of the constitution provides that "(1)ocalgovernment units shall have a just share, as determined by law' inl,he national taxes which shall be automatically released to them'"

1,2. Local Tctx - Local taxes are taxes levied by the localgovernment. Locai government units are authorized to levy taxes,fees and charges subject to such guidelines and limitations as theCongress may provide, consistent with the basic policy of localautonomy. Such taxes, fees and charges shall accrue exclusively tothe local governments (Sec. 5, Art. X, 1987 Constitution).

73. Progressiue Tax - Progressive taxes are taxes imposedwhereby the rate or amount of tax increases as the amount of theincome or earning to be taxed increases.

An example of progressive taxation is our present income taxsystem. The following table on the tax rates for individual citizensof and individual resident aliens in the Philippines shows a

graduated tax system starting from 5"/o on taxable income notexceeding I}10,000.00 and a maximum of 34o/o if the taxable incomeis over P500,000.00 (Sec. 24[A][1][c], 1997 NIRC).

I,AW OII tsASIC TAXATION IN'I'III') I'IIII'IPI]INIIS

lf Taru,blnhwmeis:

Not over?10,000

ToxDutis:

5%

Over? l0,00Obutnotoverf 30,000 ? 500+ 10%oftheextpssover? 10'000

Over? 30,000butnotoverP 70,000 ? 2'500+ 15% oftheexcessover? 30'000

OverP 70,000butnotover?140,000 ? 8'500+20%oftheexcessover? 70'000

Over?140,000 but not over?250,000 f 22'500 + 25% of ihe excess over?140'000

Over?250,000 but not overf 500,000 f 50'000 + 30% of the excess over?250'000

Over?500,000 f 125'000 + M% of the excess over?500'000

Note:EffectiveJanuary1,1999'themaximumratewillbechangedtn33%and32%on

January 1,2000.

14. Regressiue Taxes - These are taxes whereby the tax rate

decreases as the amount of income or earning to be taxed increases'

|S.Proportioruate?or-Thisataxbasedonafixedproportionofthe value of the

""Ui""i U"i'u iu*"a' like the real estate tax which is

a fixed proportion of ti'" uui"" of the property assessed'

TAXPAYER'S SUIT' In our legal system' the-re are several

instances where tu*puy*''* suits may be maintained in our courts'

For exampie, in one'case, the Court ruled that a taxpayer has the

right to file an ."ti;; q";;tioning the.vatidity or constitutionalitv of

a statute or law "rr

-,-fri-ifr"ory tiat the expenditure of public funds

by an officer of tntCot'""t'*ut't for the purpoge-o{ administering or

implementing an u"con"titutional or invalid law constitutes a

misapplication of ,'"n f"tta" (Gascon" et al' u' Arroyo' etc" et ql''

G.n. No' 78389, Oct' 16, 1989)'

In the case of Maced'a u' Macoraig' Jr'' etc" et al" supra' it was

herd that a d.uiy "i".i"a senator of the philippines a-nd a taxpayer

thereof has the i;;;i;;;;itv to file an action for certiorari'

prohibition una *"u"rrau*r, to question the legality of a claimed

refund of indirect taxes like the tax on oil producls' since the refund

itself, if found ;;;;ihout legal basis' constitutes an illegal

expenditure of Public funds'

A "derivative" or "representative" suit was held to have been

validly filed by a group of taxpayers who were also councilors of a

city, where rt app-eared that there was an iilegal disbursemr:nL of

public funds which emanated from taxes (City Councit of Cebu City

u. Cuizon, etc., et at', L'28972' Oct' 31' 1972)'

Inordertojustilyataxpayer'ssuit'itisnecessarythrrl'ptrblicfunds should be invoived. Thus, a taxpayer's suit would I'rrrl il"what

(I I.)N I]ITAL PHINCIPLES

rr r() allegerl to be illegally disposed of are objects which were acquired

l'rom private sources (Joya, et q'1. u. PCGG, et al', G''R' No' 96541'

,,lrt.g" 24, 1993).

CASES

lll,lPUBLIC v. tsACOLOD-MURCIA MILLING CO" INC"l,)'l'AL., L-19824-26, JULY 9, 1966

!'ACTS: This is a joint appeal by the above-named sugar centrals

t r., r* a decision of the bourt oi f irst Instance of Manila finding them

lrrrble to pay special assessments under R'A' 632 (charter ofl'lrilippine Sugar Institute)' R'A. 632 imposes a tax of F0'10 per

1,',',,1'of sugar-collectible for five years' such tax to be borne by the

',,,r1,., plan"ters and sugar central operators in proportion to their

,,, illing share. The Philippine Sugar Institute, using the tax collected,

1,,,.chlsed the Insular Sngu" Refinery, the operation of which by

ilr,, phiiippine Sugar Institute resulted in tremendous losses'

,l.he three sugar centrals refused to pay their tax balances and

;r;;ked for the refund of the amounts paid on the ground that the taxl,r.ing in reality a special assessmeht; once it had been determinedt lrrrt no benefit u..rr", or inures to the property owners paying the

:|lrsossffrel}t, or that the proceeds from said assessment were being

,r, is[pplied to the prejudice of those against whom it had been levied'

t L,,n the authority to insist on the payment of said assessment ceases'

ITELD: The special assessment at bar is not so much an exercise

0l l he power of taxation nor the imposition of a special assessment,

t , i rt. the exercise of police power for the general welfare of the entire,'()untry. It is, therlfore' an exercise of a sovereign power' which no

1'r ivate citizen may lawfuily resist. The three sugar centrals are,

Ilrlrefore, Iiabl6 to pay the tax in question'

( ItIUNJIENG v. PATSTONE, 42 PHIL' 818

ITACTS: Plaintiff was rlenied a building permit until he could

t)Iy a permit fee equal to one-half of the assessed value of the cityi,,,,d to be covered by the arcade of the building he was going to

,.orrstruct. Plaintiff assailed the legality of the fee and commenced

l,'11irl action to contest the same.

HELD:Inimposingafeeequaltoone.halfoftheassessedvalue,,1.t he portion of the wal-k covered by the arcade, the Municipal Board

oo

I,N W 0IT I}ASIC'|AXA?ION IN'I'III.] I'IIIT,II'I'INIIS

of Manila exceeded its powers. Nothing in the charter of the cityshows an intention to confer power on the Municipal Board to imposea license tax for revenue anent the construction of buildings. Thefee is a license tax, for a license fee may only be a sufficient amountto include the expense of issuing a license and the cost of necessaryinspection.

There are three classes of licenses which are recognized. Theyare as follows: (a) License for the regulation of useful occupationsor businesses, (b) License for the regulation or restriction ofnon-useful occupations or businesses, and (c) Licenses for revenueonly.

Licenses for useful and non-useful occupations or businessesoriginate from the police power and the accepted rule is to the effectthat the power that is conferred to regulate and to issue the licenseincludes the right to fix the amount of the Iicense fee. License fornon-useful occupations are also based on the police power and theexaction of a fee may be justified hy the power to license and regulate.However, in the fixing of the amount of the license fee, municipalcorporations are allowed a wider latitude. Consequently, Iicensefees which are in the nature of privilege taxes have been upheld asin the case of the sale of liquors.

CITY COUNCIL OF CEBU CITY v. CUIZON, ETC., ET AL.,L-28972, OCT. 3t, tg72

FACTS: The seven plaintiffs, majority members of the CityCouncil of Cebu City, fiied an action against Carlos Cuizon, Mayorof Cebu City; Jesus Zabate, Acting Cebu City Treasurer; the PNBCo.; and, Tropical Commercial Co., praying inter alia that thecontract of Feb. 5, 1966, between Cuizon, in behalf of the city, andTropical Commercial Co. for the purchase of road constructionequipment from the latter for P685,767.30 on a five-year deferredpayment plan be annulled because the contract was entered intowithout the necessary authority and approval of the City Council.Furthermore, the City Treasurer had not certified to the City Mayoras required by Sec. 607 of the Revised Administrative Code that thefunds had been appropriated for the purpose; and that the CityTreasurer did not certify the availability of funds for the purpose.

The lower court, however, ruled that on the basis of Art. l39T ofthe Civil Code, the plaintiffs lacked the legal capacity to sue sincethey are not the real parties in interest.

30 31

( i ltlN I,lltAl, I)ltl NUI I'l,US

lll,) l,l): '['he ruling of the lower court is erroneous since the, ,,rrlrlrrinl. of the plaintiffs is not a personal suit but a representative

' rr r I lr.v t,he city councilors on behalf and for the benefit of the city of(','lrrr lrncl as taxpayers.

'l'lre lower court's interpretation that only the City Mayor is,.rrrlrowored to sue for the city is untenable because here, the Mayorrr .rrltl be the last person to file such suit since he himself maintainsllr,. lt'gality of his act.

'l'her suit is like a derivative suit or a representative suit of a,lr, liholder on behalf of a corporation"

( t/\scoN, ET AL. v. ARROyO, ETC., ET AL., G.R. lIO. 7g3gg,( )( t'l'. 16, lggg

ILACTS: Following the 1986 EDSA Revolution, the Philippine(',rrrrrnission on Good Government (PCGG) sequestered the Lopezl;rrrrily's TV stations, Channels 2 and 4, and the Office of Media,\ll'rrirs took over its operation. The Lopez farnily, through counsel,r 'rluested the Aquino Government for the return of TV Channels 2,rnrl 4. The PCGG approved the return of TV Channel 2 to the|,,pezes. As regards TV Channel 4, respondent executive secretary,l,r' rruthority of the President and representing the Government,,.rrt.ered into an "Agreement to Arbitrate" with ABS-CBN,r,,lrresenLed by its president, Eugenio Lopez, Jr., pursuant to which,rn arbitration committee rvas created"

Petitioners, as taxpayers, filed a petition for certiorari andrrrjrrnction, seeking to annul and set aside said agreement.

HELD: As to whether or not petitioners have the legal1rr:rsonality or standing to file the instant petition, the Court ruledllrat in several cases, the right of a taxpayer to file an action,ltrestioning the validity or constitutionaiity of a statute or law haslrcen recognized, on the theory that the expenditure of public fundslr.y an officer of the Government for the purpose of administering orrrnplementing an unconstitutional or invalid law, constitutes arnisapplication of such funds.

The present case, however, is not an action to question ther:onstitutionality or validity of a statute or law. It is an action tolnnul and. set aside the "Agreement to Arbritrate," which, as betweenLhe parties, is contractual in character. Petitioners have not shownt.hat tirey have a legal interest in TV Station Channel 4 and thatt,hey wiII be adversely affected if and when the said television station

LAW 0!' IlASlo'fAxA'.ftoN lN'ftl l' l'tlILlPPlNl'ls

isreturnedtotheLoper,family..petitioners,therefore,havenolegal

"tu"ai"g to file the present petition'

t CA1,Tp;X PHILIPPINES, INC' v'-COMI\IISSION ON AUDIT'

Eill;- G.R. NO. s2585, MAY 8, 1ee2

FACTS:Respond'ent Commission on Audit (COA) directed

petitioner Cuft"f iftifiPilneg' Inc'. (CPI) to remit to the OiI Price

St"abiiizatior f'o.ra iOfSpl its collection of the additional tax on

petroleum p.oatttl-' put't'uu"t to P'D' 1956' as weII as unremitted

c.ilections uf tfr" ufrou, tax covering the years 1986, tr987 and 1 988'

with intere.tt a"il"charges' and arJvising it that all its claims for

reirnbursement iiomlh* opsr shall be held in abeyance pending

sui:h remittrrr"* COI further directed petitioner oil cornpany to

desisi, from further'-oiisetting thc taxes coilected against outstarrding

claims for 1989 snd sxbsequent periods'

I1s motion f's1 lsssnsideration of-the eventuai decision of ttre COA

on fhe matter ;";*g been denied' CPI imputes that respourient

commissio., u"lal'i" ter aliu' in.preventing the former from

exercising tf'" ''igi't t? "lf:.:l its remittances against lt's

reirnbu rsement vis-A-ris the OFSIr'

ItttLD: On the iseue of whether or not the amounts due tc tlie

clpsts r"om petiiio"rur*uv lr* offset against the latter's outstanding

claims frr- "uii"f,'rnd, it is settled that a taxpayer rnay not offsel

taxes due fro*'"tui*t that he may have against the G-overnment'

Tsxes cannot fr* ii* ouUj"ct of compensation because the Governmertt

and tlre tu"puV*' u'e not mutuaily creditors and debtors of each

other a,d u "t.i* iortute" is not s^uch a debt, demand' cont'ract or

:.,,ig*""t as is allowed to be set off'

'lhe Court furthel ruled that taxation is no longer envisioned as

a measllre merely t0raise revenue.to support the existence of the

Governrnent. fui"r,"uy be levied for a reguiatory purpose such as

to provide *"u"'"f" ihe reh^abiiitation and stabilization of a

threatenedindustryruhichisaffectedwithpublicinterest'aconcernwhich is within the police power of the State to address'

GARCIA v. EXEOUTM SECRETARY', E'f AL'', G"Id'

hro. rorzzS, JULYS' 1992

FACTS: Ii.O 4i5 was issued on Aug' 15' 1991 bv [)r'csident

Aqtrino,"a,.ingLt,i.rrrbeof'ad.l.itionaldutyonallinrptlr'l,r:tlrrrticlesfrorn the or"ri,,X.f r'irrlposed 9'% t'tt |o/u utf r'tulorenr, tlxct'pl' itr t:rtsers of

( i IiN I,lttAl, l'll.l N(ll l'l,l')Ii'

, rrrrl. r)rl rtntl other oil pr<-rducts which contint-red to be subject to the' t",, r r I lr rl.or(' trl ridditional duty. Following suf5mission of a report byrlr, 'l'rr'ilf'oommission upon the cornpletion qg public hearings' per

1,r,r,,'tlrrrc set lbrth in the Tariff and Custorr\s Code, the President, , ,,,,.,1 l,l.O. 478, dated Aug. 23, 1991, which lQvied in addition to the,, t,, r,. r r r crrLioned 9% ad, ualorem additional dut .y and all other existing

',,1 r',rlttratn duties, a special duty of F0'95 P'er liter or P151'05 per

l,;rrr.l of imported crud'e oil and F1 '00 Pet liter of imported oil

1,r,,rlrtt't,.

lrr rr petition for certiorari, prohibition and mandamus, petitioner,,', ,,rtlcd the validity of E'O' 475 and E'O' 478 for being violative ofli, , ll4, Art. VI of the Constitution' It was contended that since, , rr I 1, ( llyylglsss has the authority to enact rev€ nus bills, the Presidentrr'r 1' ttt)t u.ar*" such power by issuing the afcJrementioned executive,,r rl('r's which are in the nature of revenue-EQnerating measures'

ll IILD: While the enactment of appropriQtion, revenue and tariffl,rll:r is within the province of the Legislat ive, it does not follow'lrowtlv€r, that E.O.475 and E.O.478 ma), not be issued by thet,r,,sident, because under sec. 28(2) of Article vI of the constitution,tlr.rc is explicit permission to Congress to authorize the President,;rrbject to such limitations and restrictiQns as [congress] may

,,,,g,cise,'to fix*within specific limits" "tariFf rates x x x and other,lrrt ies or imposts x x x'"

The relevant congressional statute is t-he Tariff and Customs( torle of the Philippines, particuiarly Secs- 104 and 401, being the

p.rtinent provisiqns. These are the provisions which the President,'xlrlicitly invoked in promulgating E'O' 475 and E'O' 478'

OSMEilIA V. ORBOS, ETC., ET AL.' G'Et . NO. 99886' MAR' 31'

I 993

FACTS: Under P.D. 1956, the Oil Price Stabilization Fund(oPSF) was created as a special fund for reimbursing oil companies

1or cost increases in crude oil and imporrted petroleum products

resulting from exchange rate adjustments and from increases inworld market prices of crude oil. The OPSI' was reclassified into a

trust liability account by virtue of E'O' lo24 in 1985 and was ordered

released to the Ministry (now, Department) of Energy' Said executive

order also authorized the investment of tihe fund in government

securities, with earnings therefrom accruir:\g to the fund. E.O. 137,

issued on Feb, 27,1987 , amended P.D. 1956 tay expanding the grounds

for reimbursement by oil companies for po ssible cost underrecovery

33

LAW Ol,' llASl(;'t'AXA'l'lON IN't'll I,t I,illl,lt,l)lNI,tS

due to reduction of dornestic prices of petroleum produced, asdetermined by the Ministry (now, Department) of Finance.

Petitioner avers that the creation of the trust fund violatesSec. 29(3), Art. VI of the Constitution. He argues that the moniescollected pursuant to P.D. 1956 should be treated as a speciar fund,not as a trust account or trust fund and should be used onry for thespecial purpose or objective for which it was created.

HELD: Likening the OPSF to the sugar stabilization fund andciting the ruling in Gaston, et al. u. Republic Planters Bank, et al.(G.R. No. 77L94, Mar. 15, 1988) which explained the nature andupheld the validity of the sugar stabilization fee, the Court heldthat while the funds collected may be referred to as taxes, they areexacted in the exercise of the police power of the state. Moreover,that the OPSF is a special fund is plain from the special treatmentgiven to it by E.O. 137. It is segregated from the general fund; andwhile it is placed in what the law refers to as a "trust liabilityaccount," the fund nonetheless remains subject to the scrutiny andreview of the coA. The court is satisfied that these measures complywith the constitutional description of a "special fund."

MACEDA v. MACARAIG, JR., ETC., ET AL., G.R. NO. 88291,JUNE 8, 1993 (RESOLUTION)

FACTS: Petitioner moves for reconsideration of the decision inthe instant case promulgated on May 81, 19g1 sustaining theexemption of private respondent National Power Corporation (NpC)from all forms of taxation.

HELD: A chronological review of the NPC laws will show thatit has been the lawmaker's intention that the NPC was to becompletely exempt from aII forms of taxes - direct and indirect.

On the issue as to who pays for the taxes due the Governmentfor the sale of bunker fuel oil to the NPC, the Court, quoting DOJOpinion No. 106, series of 1954, ruled that oil companies whichsupply bunker fuel oil to the NPC have to pay the taxes imposedupon said bunker fuel oil sold to the NPC. By the very nature ofindirect taxation, the economic burden of such taxation is expected.to be passed on through the channels of commerce to the user orconsumer cf the goods sold. Beca,u,se, however, the NPC has beenexempted from both direct and indirect taxation, the NPC must beheld exempted from absorbing the economic burden of indirecttaxation. If the NPC purchases such oil from the oil companies, the

34 35

( i l,)N l,lltAl, l'ltl NC I t'l,lts

irl'(' r:i t'rrt,it,lcd t,<-r lre reimbursed by the BIR for that part of thel, r r,, r. ;i l r rir:o ol' Nl'}C which verifiably representQ the tax already paidl,. tlr. ,il conrpany-vendor to the BIR.

lr)\'4, t,l'll AL. v. PRESIDENTIAL COMMISSION ON GOODr ioV I,ItNMENT (PCGG), ET AL., G.R. NO. 96541, AUG. 24, 1993

/, l(l'l'^S; Petitioners, luminaries in the local art scene and as

rir r t,, \,(,r's, filed a petition for prohibition and mandamus seeking to!,r 1 , r n t lrc PCGG from proceeding with the auction sale by Christie's,,t llr,,"v York, per Consignment Agreement, of the OId Mastersl',irrrtnrgs as well as 18th and 19th century silverware seized froml\lirl;r.irrrang and Metropolitan Museum of Manila and placed undertlr,., rr:;tocly of the Central Bank. They alleged that said artworks,., r, lrrst.orical relics having cultural significance whose disposal,,, , 1,r'ohibited by law. Respondents defended the Consignment\1,r.r'111g111 and their authority to sign the same averring that saidI',urrlrngs and antique silverware were part of the ill'gotten Marcos'- , ,r lllr ;rnd did not fall within the classification of protected cultural1,r,,1r.r'tics nor specifically qualified as part of the Filipino cultural11, r rltr11c.

llllt,D: The rule is settled that no question involving the,,,rr,t rl rrtionality and validity of a law or governmental act may be1,,,rr rl rrnd decided by the court unless there is compliance with thel, 1,irl lcquisites for judicial inquiry. Petitioners, having failed to,lr,,rv Llrat they are legal owners of the artwork or that the valuedi.,,,,'r; have become publicly owned, do not possess any clear legalrrl,lrt lo question the alleged unauthorized disposition thereof.

l.lr,it,her can this petition be allowed as a taxpayer's suit. Not, , , r 1, rrction filed by a taxpayer can qualify to challenge the legality,,1 ,,llrr:iul acts done by the Government. A taxpayer's suit can prosper, , rr I y rl t,[-re governmental acts being questioned involve disbursement, ,l 1, rr lr lic funds upon the theory that the expenditure of public fundslr1' ;ur officer of the State for the purpose of administering an, r rr, , r r rs[itutional act constitutes a misapplication of such funds, whichr,r:r v l)(' enjoined at the request of a taxpayer. Obviously, petitioners,, r ,' not, challenging any expenditure involving public funds but the,lr''p.sition of what they allege to be public properties. It is worthyt', not,e that petitioners admit that the paintings and antique,rrl'r,r'w&r€ were acquired from private sources and not with publicIrntl('y.

LAW OIT BASIC TAXATION IN THE PHILIPPINES

COMMISSIONER OF CUSTOMS v. MANILA STAR FERRY,INC., ET AL., G.R. NOS. 31776-78, OCT. 21, 1993

FACTS: Manila Star Ferry, Inc., United Navigation andTransportation Corporation and Chiat Lee Navigation are the ownersof the tugboat 'Orestes,' the barge Iighter UN-L-106, and the vesselS/S Argo.

On June 12, 1966, the S/S Argo, the Orestes and UN-L-106, alongwith two wooden bancas of unknown ownership were apprehendedfor smuggling. They were caught in the act of unloading importedcigarettes, clothing materials and apparel and piastic bags alongthe Manila Bay, all of which were not manifested and declared fordischarge by said vessel.

Seizure and forfeiture proceedings against S/S Argo and its cargoand the other watercrafts were initiated for violation of Sec. 2580(a),(b) and (c) of the Tariff and Customs Code, along with appropriatecriminal charges. In a decision by the Collector of Customs, asaffirmed by the Customs Commissioner, the vessels and watercraftswere declared forfeited in favor of the Government pursuant toSec. 2530(a) and (b). The CTA, acting on the petition for review,substantially modified said decision by ordering private respondentsto instead pay fines.

HELD: Sec. 2530(a) in unmistakable terms provides that avessel engaged in smuggling "in a port of entry" cannot be forfeited.This is the clear and plain meaning of the law. It is not within theprovince of the Court to inquire into the wisdom of the law, for indeed,it is bound by the words of the statute. Neither can words be put inthe mouths of the lawmakers. A uerba legis non est recedendum.

Nevertheless, although the vessel cannot be forfeited, it is subjectto a fine of not more than F10,000 for failure to supply the requisitemanifest ofthe unloaded cargo under Sec. 2521 of the Code.

SAN CARLOS MILLING CO., INC. v. COMMISSIONER OFINTERNAL REVENUE, ETAL., G.R. NO. 103379, NOV.23,1993

FACTS: Petitioner corporation had a totai income taxoverpayment of P781,393 for taxable year 1982, reflected ascreditable income tax in its annual final adjustment return. Saidamount was not applied against its 1983 tax liabilities because itsustained a net loss for that year and it still had a creditable incometax of ?4,47A. Thus, its final adjustment income tax return fortaxable year 1983 reflected the amount ofF781,393 carried over as

36 37

GIINERAL PRINOIPLF]S

rr t,rrx credit and F4,470 as creditable income tax.

Iretitioner signified its intention to apply the total creditablerrrrruunt of P785,863 against its 1984 tax liabilities pursuant toFirt:. 86 of the Tax Code (now, Sec. 76, 1997 NIRC), accompanied byrrrr trlternative request for a refund or tax credit' Respondentr,ornmissioner disailowed the proffered automatic credit scheme, butl,r*rrted the request as an ordinary claim for tax refund or credit,rrrrrl pursuant to Sec. 292 (now, Sec' 229, 1997 NIRC) in relation tol,ir,c. 295 (now, Sec, 204, 1997 NIRC) of the Tax Code, subjected therin rne to verification/investigation.

On review, the CTA heid that prior investigation by and authorityl'rom the CIR were necessary before a taxpayer can avail of a taxrt,l'und or credit. The Court of Appeals, upholding the ruling of theI,rrx court, dismissed the appeal thereto'

HELD: On the main issue of whether or not prior authority fromI,lro Commissioner of Internal Revenue is necessary before a corporatelrrxpayer can credit excess estimated quarterly income taxes paidrrllainst the estimated quarterly income tax iiabilities for therrrrt:r:eeding taxable year, under Sec. 86 of the Tax Code (now,,\r'r:. 76, 1997 NIRC). respondent court correctly held that the choicenl'u corporate taxpayer for an automatic tax credit does not lpso

f trcto confer on it the right to immediately avail of the same andr,rrrphasized the need for an investigation to ascertain the correctnessol'Lhe corporate returns and the amount sought to be credited.

Prior approval by the Commissioner of Internal Revenue of thel,rrx credit would appear to be the most reasonable interpretation tolrc given to said section. An opportunity must be given the internalrovenue branch of the Government to investigate and confirm thevcracity of the claims of the taxpayer. The absolute freedom thatpctitioner seeks to automatically credit tax payments against taxlirrbilities for a succeeding taxable year, can easily give rise tor:onfusion and abuse, depriving the Government of authority andr:ontrol over the manner by which the taxpayers credit and offsetl,heir tax iiabilities, not to mention the resultant loss of revenue tot,he Government under such a scheme.

I'ATALINGHUG v. COURT OF APPEALS, ET AL.' G.R.NO, 104786, JAN. 27,1994

FACTS: The Sangguniang Panlungsod of Davao City enacted()rdinance No. 363 in 1982, otherwise known as the Expanded ZoningOrdinance of Davao City, Sec. 8 of which provided that C-2 districts

LAW OF BASIC TAXATION IN THN PHILIPPINES

shall be for predominantly commercial and industrial use.

Petitioner applied for and was granted a building permit for theconstruction of a funeral parlor named Metropolitan Funeral Parlorat Cabaguio Avenue, Agdao, Davao City. Private respondents whoare residents of Barangay Agdao, complained that since theconstruction of said funeral parlor was within the b0-meter radiusfrom the Iglesia Ni cristo (INC) and several residential structures,it violated the restrictions under Sec. 8 of said city ordinance. TheIower court dismissed the complaint on the ground that there wasno violation of the regulatory provision of the zoning ordinance.

On appeal, the Court of Appeals reversed the lower court'sdecision by annulling petitioner's buiiding permit. It ruled that evenif the buildings owned by the INC and respondent Cribillo werebeyond the 5O-meter residential radius, the funeral parlor waswithin the 50-meter radius from the building of one Wilfred Tepoot.Overruling the lower court's determination that said building wascommercial, the appellate court held that although Tepoot's buildingwas used by a lessee for a laundry business, nevertheless, per taxdeclaration, it was a residential lot.

HELD: The appellate court's decision is reversed and the lowercourt's ruling that petitioner did not violate the city zoning ordinanceis reinstated.

The reversal by the Court of Appeals of the trial court's decisionwas based on Tepoot's building being declared for taxation purposesas residential. The court held that a tax declaration is not conclusiveof the nature of the property for zoning purposes. A property mayhave been declared by its owner as residential for real estate taxationpurposes but it may well be within a commercial zone. A discrepancymay thus exist in the determination of the nature of property forreal estate taxation purposes vis-d-vis the determination of theproperty for zoning purposes.

COMMISSIONER OF INTEBNAL REVENUE v. MOBILPHILIPPINES,INC., ET AL., G.R. NO. 704920,ApR. 28,1994

FACTS: The Energy Regulatory Board (ERB) issued ResolutionNo. 87-02, dated Feb. 11, 1987 and Resolution No. 87-03, datedMar. 16, 1987, respectively increasing by an average of 30.2 and54.7 centavos per liter, retroactive to Jan. 1, 1987 and Mar. I, 1g87,the cost recovery of oil companies on the various petroleum productsrefined and marketed by them locally. As a result of theee reuolutions,BIR assessed Mobil Philippines, Inc. (Mobil) a deficiency ad. ualorem

38 39

GIINERAL PRINCIPLES

t,ux on petroleum products withdrawn from the refinery. In addition,rr surcharge of 25oh was imposed by the BIR for Mobil's failure tolrrry tho additional ad, ualorem taxes in a timely manner, i.e., withinI 5 days from the respective dates of the two resolutions'

while Mobil agreed to pay the additional a.d ualorem taxes, it,Irowever, protesred the assessment of the 25% surcharge on thegrcrund that at the time the excise tax or ad ualorem tax on the

ltroducts were due, the additional tax base was not yet in existenceirnd hence the additional tax could not be paid. There was, therefore,

rrs argued by Mobil, no delay for which the 25% surcharge was sought

t,o be collected.

In rejecting the protest of Mobil, the commissioner of InternalItovenue stated that the dates of the two BOE (now, ERB) resolutionswcre,,by inference the date of removal of the products from the place

of'production mentioned in Sec. 110" of the Tax Code (now, Sec' 130,

teeT NIRC}After the BIR Commissioner was sustained by the cTA, Mobil

wcnt to the court of Appeals which declared that Mobil was notguilty of delay in the payment of the adjusted excise tax for the reason

lhat there was no period specified in the resolutions for the paymentof'said taxes. According to the court of Appeals, one cannot incur intlr.:lay when there is no period fixed for payment'

HELD: In reversing the decision of the Court of Appeals, thesupreme court declared that while it is literally true that therrtljusted tax base, or the wholesale posted price as increased by or

rrs a result of the operation of the two resolutions did not exist 15

rluys after physical removal of the product from the refinery, however,

il' t,hat contention were taken literally and seriously, the additionalrrd ualorem taxes on the previously withdrawn petroleum products

would be payable only when it would please Mobil to pay such taxes'

Such a r"rrrit is absurd and certainly repugnant to public policy, for(lre additio rtal ad. ualorem taxes were clearly due on the additionalvrrlue undeniably accruing to Mobil's benefit in respect of previously

w ithdrawn prod.ucts but not yet disposed of by the time the increase

in cost recovery of oil companies was arithorized by the ERB

rcsolutions.

MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS,INC. V. DEPARTMENT OF FINANCE SECRETARY, G.R.NO. 1"08524, NOV. 10, 1994

FACTS: Petitioner coconut traders association is engaged in

LAW OT BASIC TAXATION IN THE PHILIPPINES

buying and_ selling copra in Misamis oriental. petitioner alregesthat under sec. 108(b) of the Tax code (now, sec. 109[cJ, lggr NIRC),copra was classified as an agricultural food product, and, therefore,exempt from value-added tax (vAT) at alr rtugu. of production ordistribution.

on June 11, 1991, Revenue Memorand.um circurar No. 47-g1was issued, classifying copra as an agriculturar non-food productunder Sec. 108(a) (now, Sec. l\g[aJ, iSSf NmCl and declaring itexempt from vAT only if the sale is made by the primary prod.ucer.

Petitioner challenges such reclassification of copra as anagricultural non-food product because it has the effect of denying topetitioner the exemption it previously enjoyed when "opr" *r.classified as an agricuitural food product.

HELD: In inte_rpreting Sec. 1QB(a) and (b), NIRC (now,sec. 109[a] and [cJ, r99z NIRC). the commission"" of InternalRevenue gave it a strict construction consistent with the ruie thattax exemptions must be strictly construed against the taxpayer andliberally in favor of the State.

Moreover, as the government agency charged with theenforcement of the law, the opinion of the commissioier of InternalRevenue, in the absence of any showing that it is plainly wrong, isentitled to great weight. The ruling was made by the commissionerof Internal Revenue in the exercise of his po*u, und.er s".. z+s orthe NIBC (how, secs. 244 a*d, z4i, rggr tunq to make rurings oropinions in connection with the implementation of the provisions ofinternal revenue laws, including rulings on the classification ofarticles for sales tax and similar purposes.

coMMIssIoNER oF INTEBNAL REVENUE v. couRT oFAPPEALS, ET AL., G.R. NO. t041Et, and ATLASCONSOLIDATED MINING AND DEVELOPMENTCORPORATION v. CoURT oF APPEALS, nr ei., c.n.NO. 105563, jointly decided on MAR. 10, 1996

FACTS: Petitioner Atras consolidated Mining and Developmentcorporation (ACMDC) is a domestic corporation which owns andoperates a mining concession in Toledo City, Cebu.

on Apr. 9, 1980, the commissioner of Internal Revenue, actingon the report of BIR examiners, served on ACMDC an assessmentnotice and demand for payment of F1Z,gg1,0T0.b1 representingdeficiency ad ualorem percentage and fixed taxes prus incrementsfor the taxable year 192b. Likewlse, another assessment notice with

40 4L

GENEBAL PRINCIPLES

tllrrrund for payment and business taxes with F5,000 compromiselrt'nultf was served on ACMDC.

ACMDC protested both assessments, but the same was denied,Irt'nce it filed petitions for review before the Court of Tax Appeals((1'l'A). On May 31, 1991, the tax court rendered a consolidatedrf r'<rision holding that (1) ACMDC was not liable for deficiency adt'tt,lorem tax on copper and silver for 1975 and 1976, therebyrrl'f"cctively sustaining ACMDC's theory that in computing ad uq.loremIrrx on copper minerals, the refining and smelting charges should berloducted, in addition to freight and insurance charges from thel,ondon Metal Exchange (LME) price for manufactured copper; and,(2) ACMDC was liable fot ?1,572,637.48, exclusive of interests,r:rrrrsisting of 25o/o surcharge for late payment of the ad ualorem taxrr nd late filing of notice of removal of silver, gold and pyrite extractedtluring certain periods and for alleged deficiency manufacturer's salesl,lrx and contractor's tax.

In separate petitions for review elevated to the Court ofAppeals,t,he Commissioner questioned the portion of the CTA's decisionrlcleting the ad ualorem tax on eopper and silver, and ACMDC, ont,he other hand, assailed the portion of the decision ordering it tolray P1,592,637.48 representing deficiency assessment.

Respondent appeilate court rendered judgment affirming the tax<:ourt's manner of computing the ad valorern tax. Thus, theOommissioner filed a petition before the Supreme Court (G.R.No. 104151) raising as sole issue whether in the computation of odpalorem tax, smelting and refining charges, in addition to freightand insurance charges, should be deducted from the price ofcopperconcentrates.

ACMDC, stiil not satisfied with the decision of the Court ofAppeals reducing its tax liability to F906,124.49 by deleting the 25%surcharge on silvdr, gold and pyrite, similarly filed a petition beforethe Supreme Court (G.R. No. 105563) alleging that it should not beliabie for any deficiency tax assessment for 1975 and 1976.

HELD: In G.R. No. 104151, the Court held that the provisionsofthen Secs. 243 ar,d246 ofthe Tax Code provide that the assessmentshail be based, not upon the cost of production or extraction of saidminerals or mineral products, but on the price which the same-before or without undergoing a process of manufacture-wouldcommand in the ordinary course of business.

In the instant case, the allowance by the tax court of smeltingand refining charges as deductions is not contrary to the above-

flI,AW OF BASIC TAXATION IN THE PHILIPPINES

mentioned provisions of the Tax Code which ostensibly prohibit anyform of deduction except freight and insurance charges. A reviewof the records showed that it was the London Metal Exchange priceon copper wire bar which was used as tax base by ACMDC forpurposes of the 2o/o ad ualorem tax on copper concentrates since therewas no available market price quotation in the commodity exchangeor markets of the world for copper concentrates nor was there anymarket quotation locally obtainable. Hence, the charges for smeltingand refining lyere assessed not on the basis of the price of the copperextracted at the mine site which is prohibited by law, but on thebasis of the actual market value of the manufactured copper whichin this case is the price quoted for copper wire bar by the LondonMetal Exchange.

In several cases, it has been held that the ad ualorem tax is to becornputed on the basis of the market value of the mineral in itscondition at the time of such removal and before it undergoes achemical change through manufacturing process, as distinguishedfrom a purely physical process which does not necessarily involvethe change or transformation of the raw material into a compositedistinct product.

Therefore, the imposable od uqlorem tax should be based on theselling price of the quarried rninerals, which is its actual marketvalue, and not on the price of the manufactured product. If themarket value chosen for reckoning is the value of the manufacturedor finished product, as in the case at bar, then all expenses ofprocessing or manufacturing should be deducted in order toapproximate as closely as possible the actual market value of theraw mineral at the mine site.

As a matter of practice and principle, the Supreme Court willnot set aside the conclusion reached by an agency such as the CTA,which is, by the very nature of its function, dedicated exclusively tothe study and consideration of tax problems and has necessarilydeveloped an expertise on the subject, unless there has been an abuseor improvident exercise of authority on its part.

In G.R. No. 105563, the Court ruled that under Sec. 248 of thethen Tax Code, the payment of ad ualorem tax shall be made uponremoval of the mineral products from the mine site or if paymentcannot be made, by filing a bond in the form and amount to beapproved by the Commissioner conditioned upon the payment of saidtax.

In the instant case, the records show that the payment af. odualorem tax on gold, silver and pyrite was belatedly made. Bad faith

42 43

GTiNERAL PRINCIPLDS

is not essential for the imposition of the 25% surcharge for Iate

lrayment of the ad. ualorenr. tax. The justification given by ACMDC

i,t ut tfru quantity of gold, silver and pyrite on which t]ile ad ualorem

l,ax is based can only be determined after it goes through some

processing is not sufficient to relieve ACMDC of its liability to pay

l,he 25% surcharge for }ate payment.

The law requiring the payment of the 25% surcharge in case theq,d, ualorem tax is not seasonably paid is mandatory' It provides a

plan which works out automatically. The cornmissioner of Internalil*,r".rru is not vested with any authority to waive or dispense withbhe collection thereof.

As for the manufacturer's tax imposed under then Sec. 186 of

the Tax code and based on the legal concept of "engaging inbusiness,,'ACMDC cannot be held liable therefor. A manufacturer,in order to be subjected to pay the percentage tax under said section,

must be "engaged" in the sale, barter or exchange of personalproperty. It cannot be legally asserted, for purposes ofthis particularu"r"".*"rt only, that ACMDC was engaged in the business of selling

grinding steel LaIIs on the basis ofthe isolated transaction entered

into by lt i., f gZS. There is no showing that said tralsaction was

underiaken by ACMDC with a view to gaining profit therefrom and

with the intent of carrying on a business therein. The sale v/as more

of an accommodation to the other mjling companies. weII settled is

the rule that anything done as a mere incident to, or as a necessary

consequen"" oi, the principal business is not ordinarily an

independent business in itseif. ACMDC was not a manufacturersubject to percentage tax imposed under Sec' 186'

The same conclusion, however, cannot be made with respect to

the contractor's tax being imposed on ACMDC under the former

sec. 191 of the Tax Code. It cannot validly claim that the leasing

out of its personal properties was merely an isolated transaction.

Its book of accounts .ho*. that several distinct payments were made

for the use of its personal properties such as its plane, motor boat

and dump truck. Considering that there was a series of transactions

involved, plus the fact that there was an apparent and protracted

intention io profit from such activities, it can be safely concluded

that ACMDCwas habitually engaged in the leasing out of its plane,

motor boat and dump truck, and is perforce subject to the contractor's

tax.

Assessmen ts are prima facie presumed correct and made in good

faith. It is the taxpayer and not the Bureau of Internal Revenue

who has the duty of proving otherwise' It is an elementary rule that

LAW Ol,' llASl()'l'Axn'l'lON IN't'ltl,l PHILIt,PINITS

in the absence of proof of any irregularities in the performance ofofficial duties, an assessment will not be disturbed. All presumptionsare in favor of tax assessments. Verily, failure to present proof oferror in the assessment wiII justify judicial affirmance of saidassessment.

Tax statutes are to receive a reasonable construction with a viewto carrying out their purpose and intent. They should not beconstrued as to permit the taxpayer to easily evade the payment ofthe tax.

PHILIPPINE AIRLINES, INC. v. SECRETARY OF FINANCE,ET AL., G.R. NO. 115852, OCT. 30, 1995, and companion cases(RESOLUTTON)

HELD: Reiterating its earlier decision declaring theconstitutionality of R.A. 7716, otherwise known as the ExpandedValue-Added Tax Law, the Court held, inter alia, that the enactmentof R.A. 7716 as a revenue tax measure conforms with the procedureprescribed by Sec. 24, Art. Vl of the Constitution.

While Sec. 24, Art. VI provides that all appropriation, revenueor tariff bills, bills authorizing increase of the public debt, bills ofIocal application, and private bills must "originate exclusively in theHouse of Representatives," it also adds, "but the Senate may proposeor concur with amendments." In the exercise of this power, the Senatemay propose an entirely new bill as a substitute measure. S. No.1630, as a substitute measure, is therefore as much an amendmentof H. No. 11197 as any which the Senate could have made.

As regards the requirement in Sec. 26(2), Art. VI of theConstitution that the title of the law shall contain the subject of thebill, by stating that R.A.7716 seeks to "[Restructure] The Value-Added Tax (VAT) System [By] Widening Its Tax Base and EnhancingIts Administration, and for These Purposes Amending and Repealingthe Relevant Provisions of the National Internal Revenue Code, asAmended and for Other Purposes," Congress thereby clearlyexpresses its intention to aurend any provision of the NIRC whichstands in the way of accomplishing the purpose of the iaw.

As a general proposition, the press is not exempt from the taxingpower of the State and that what the constitutional guarantee offree press prohibits are laws which single out the press or ttrrget agroup belonging to tire press for speciai treatment or which in anyway discriminate against the press on the basis of the contctrt, r-r{i thepublication, and R.A. 7'i16 is not one of these.

44 45

( I t,lN I,lltAL P tilN() l l,l,lrs

Wrth respect to the contention that by removing the exemptions,l't.he press from the VAT while maintaining those granted to othersrrrirkes the law discriminatory, it was held that since the law grantedilrc press a privilege, the law could take back the privilege anytimew it,hout offense to the Constitution. The reason is simple: by granting,.xcmptions, the State does not forever waive the exercise of its:rovereign prerogative. In withdrawing the exemption, the Iawrrrorely subjects the press to the same tax burden to which otherlrrrsinesses have long been subject.

The VAT is not a Iicense tax. It is not a tax on the exercise of alrrivilege, much less a constitutional right. It is imposed on the sale,lr;rrter, Iease or exchange of goods or properties or the sale or,';rchange of services and the lease of properties purely for revenuet)urposes. To subject the press to its payment is not to burden thelxercise of its right any more than to make the press pay income taxor subject it to general regulation is not to violate its freedom underl he Constitution.

I'HILEX MINING CORPORATION v. COMMISSIONER OFINTERNAL REVENUE, ETAL., G.R. NO. 125704,AUG.28, 1998

FACTS: The BIR sent a letter to petitioner Philex MiningCorporation (Philex) on Aug. 5, 1992 asking the latter to settle itstax liabilities for the second, third and fourth quarters of 1991, andof the first and second quarters of 1992, totaling ?123,821,982.52.l'}hilex protested the demand for payment of tax liabilities statingt,hat it has a pending VAT input credit/refund for taxes paid for the.years 1989 to 1991, amounting to P119,977,037.02 plus interest,which should be applied against its tax liabilities, citing as authorityt,he ruling rn Collector of Internal Reuenue u. Itogon-Suyoc Mines,Inc., et al.

On Sept. 7,1992, BIR, disregarded Philex's position and declaredthat no compensation can take place and reiterated its demand forpayment of tax liabilities plus interest within 30 days from receipt.In view thereof, Philex raised the issue before the CTA on Nov. 6,1992. In the meantime, the BIR issued a tax credit forP13,144,313.88which, as applied to Philex's tax liabilities of ?123,821,982.52,Iowered petitioner's tax obligation to ?110,677,688.52.

The CTA ordered Philex to pay the remaining balance of its taxobligation plus interest, holding that there can be no legalcompensation between a iiquidated debt to the Government and anunliquidated claim ofpetitioner; besides, taxes cannot be subject to

LAW Ol.' llAslLl't'AXA'ftON lN 1'll t'l l'Flll,l l)l'lN!)S

offset or compensation. The Court of Appeals affirmed the decisionof the CTA, and denied petitioner's motion for reconsideration.

A few days after such denial, Philex obtained its VAT inputcredit/refund for 1989 to 1991, 1992 and 1994. Consequently, Philexinsisted that ipso jure there can now be an offset between said inputcredit/refund and its excise tax liabilities since both have alreadybecome due, demandable and fully liquidated, and legaIcompensation can properly take place.

HELD: The Supreme Court found no merit in petitioner'scontention. Taxes cannot be subject to compensation for the simplereason that the Government and the taxpayer are not creditors anddebtors of each other. There is a material distinction between a taxand a debt. Debts are due to the Government in its corporatecapacity, while taxes are due to the Government in its sovereigncapacity.

It has been categorically and repeatedly held that taxes cannotbe subject to set-off or compensation (Francia u. IntermediqteAppellate Court, et al., G..R. No. 67649, June 26, 1988; ColtexPhilippines, Inc. u. Commission oru Audit, et al., G.R. No. 92585'May 8,1992).

The ruling in Commissioner of Internal Reueruue u. Itogon,'SuyocMines, Inc., et al. (L-25299, July 29, 1969) no longer has any supportin statutory law. The premise of the ruling in the aforementionedcase was anchored on Sec. 51(d) ofthe National Internal RevenueCode of 1939. However, when the National Internal Revenue Codeof 1977 was enacted, the same provision upon which the ltogon,'Suyocpronouncement was based was omitted. Accordingly, the doctrineenunciated in ltogon-Suyoc cannot be invoked by Philex.

A distinguishing feature of a tax is that it is compulsory ratherthan a matter of bargain. Hence, a tax does not depend upon theconsent of the taxpayer. If any taxpayer can defer the payment oftaxes by raising the defense that it stiil has a pending claim forrefund or credit, this would adversely affect the government revenuesystem. A taxpayer cannot refuse to pay his taxes when they falldue simply because he has a claim against the Government or thatthe collection of the tax is contingent on the result of the lawsuit itfiled against the Government.

46 47

( I I,lN I,)Rn L PItl N(ll l'l,lrs

AuISCO INSURANCE CORPORATION, ET AL. v. COURT OF,\t,t,lrALS, ET AL., G.R. NO. 112675, JAN. 25, 1999

ttAcTS: Petitioners comprise 41 domestic non-life insurance, or-l)or6tions. Upon issuance by them of various machinery insurance

lrolit:ics, petitioners entered into reinsurance treaties withNlrrnchener Ruckversicherungs'Gesselschaft (Munich), a

,,,,rr resident foreign insurance corporation on Aug. 1, 1965' Thenlirlrirnce treaties required petitioners to form a pool, as one was

,',,',rrlingly formed on the same day.

'l'he pool of machinery insurers submitted on Apr' 14, L976 alrrr;rrrcial statement and an "Information Return of Organizationl,lxr.rrrpt from Income Tax" for 1975 on the basis of which the('ollccior of Internal Revenue assessed deficiency corporate taxes,,rrtl withholding taxes at source and on dividends paid to Munichrr rrrl to petitioners. The assessment was protested through the pool's

,rutlitor, SGV and Co.

On Jan. 27, 1986, the Commissioner denied the protest and,,r'tlcred. petitioners, assessed as "Pool of Machinery Insurers"'to pay,1,.l'iciency income tax, interest and withholding tax-

The court of Appeals ruled that (1) the pool of machinery insurers\ry1rs a partnership taxable as a corporation and that the latter's,.ollection of premiums on behalf of its members, the ceding,'ornpanies, was taxable income; and, (2) prescription does not barrlrt:

-BIR from collecting taxes due because the taxpayer cannot be

located. at the address given in the income tax return filed.l'ctitioners contend otherwise.

HELD: The petition has no merit. The supreme court sustainedl,he ruling of the appellate court that the pool is taxable as ar.orporation, and that the Government's right to assess and collectt,he taxes had not prescribed.

on the issue of whether or not the pool or clearing house is

I,axable as a corporation, the supreme court ruled that ineludiblythe Philippine legislature, per Sec. 24, NIRC as worded in 1975,

included in the concept of corporations those entities that resembledt,hem such as unregistered partnerships and associations. The NIRC'sinclusion of such entities in the tax on corporations is made even

clearer by the Tax Reform Act of 1997 which amended the Tax Code,

the pertinent provisions being Secs. 22 and 27(A), 1997 NIRC'

The court, citing Euangelista et al. u. collector of InternalReuenue, et al. (102 Phil. 140), heid that then Sec' 24 covered

l,nw olr llnsl(l'l'AXA',l'toN lN 1'illl pHlLilrplNlrs

unregistered partnerships and even associations or joint accountswhich had no legal personalities apart from their individualmembers.

In the instant case, prescinding from Art. 1T6z of the civil code,which defines a contract of partnership, the court ruled that theceding companies entered irrto a pool agreement or an associationthat would handle all insurance businesses covered und.er theirquota-share reinsurance and surplus reinsurance treaties withMunich, considering the following indicia: (1) the poor has a commonfund that pays for its administration and operating expenses;(2) the pool functions through an executive board composed ofrepresentatives from the ceding companies; and (3) while the poolis not a reinsurance and does not issue i.nsurance policies, its workis indispensable, beneficial and useful to the business of tire cedingcompanies.

As to whether or not remittances to the pool are dividendssubject to tax and would constitute double taxation for taxing thesame premium income twice, the court ruled that the pool is ataxable entity distinct from the individual corporate entities of theceding companies. The tax on its income is obviously different fromthe tax on the dividends received. by said companies. clearly, thereis no double taxation here.

The tax exemptions claimed by petitioners cannot be granted,since their entitlement thereto remains.,,.rp"ou!., andunsubstantiated. It is axiomatic in the law of taxation that taxesare the lifeblood of the nation. Hence, exemptions therefrom arehighly disfavored in law and he who claims tax exemption must beable to justify his claim or right. petitioners have failed to dischargethis burden of proof. The sections of the 1g77 NIRC cited areinapplicable because these were not yet in effect when the incomewas earned and when the subject information return for the yearending 1975 was filed.

The exemption granted to the reinsurance companies undersec. 255 of the 197b version of the NIRC cannot be applied to theinstant case because the pool is a taxabre entity distirrct from theceding companies and, therefore, the latter cannot individually claimthe income tax paid by the former as its own. Sec. 2a@)(1) (now,sec. [28J[1J, 1997 NIRC) pertains to tax on foreign corporations, henceit cannot be claimed by the ceding corporations. Neither ca, Munichbe granted exemption solely on the basis of this provision of the Taxcode because it specifically taxes dividends, the type of remit,tancesforwarded to it by the pool. whiie not a signatory o[' 1,he pool

48 .,i tl

( ; I.] N IIITAL PII,INC]IPI,ES

,\1irct'rnent, Munich is apparently an associate of the companies1,rn-suant to the reinsurance treaties, which required the formation,,1 llrt'said pool. Munich cannot be considered tax exempt under theli l' Wcst Germany Tax Treaty because the assessment for corporatenr('()rne tax was made when the treaty was not yet in effect.

l,'inally, on whether or not the Government's right to assess and,,,llcct the subject taxes had prescribed, the Court ruled that the1,r'r'ricriptive period was tolied under Sec. 333, NIRC (now, Sec. 223,t !97 NIRC) because "the taxpayer cannot be located at the addresslirvt'n in the information return filed and for which reason there

'r':rs rlelay in the sending the assessment." The law states that said1,r'r'iod will be suspended only if the taxpayer informs the(lr)nrmissioner of any change of address. Indeed, whether the( i,rvernment's right to collect and assess the tax has prescribedrrrvolves facts which have been ruled upon by the lower courts. Intlrr, :rbsence of a clear showing of palpable error or grave abuse of,lrscretion, as in this case, the Court rnust not overturn factualI rnrlings of the CTA or the Court of Appeals.

EXERCISES

1. (a) What is taxation? What are the elements of a tax?l,)xplain.

(b) Do tax laws operate beyond the jurisdictional iimits of acountry? Explain.

(c) Is not the principle of territoriality or situs vioiatedwhenever the Philippine Government taxes the income ofrron-resident citizens abroad? Explaiu ycur answer.

2. (a) Distinguish between tax and iicense fee.

(b) Is the taxing power inherent in the State as well as in thelocal governments? Explain.

3. The VAT (value-added tax) law authorizes the refund or taxcredit of "input taxes" passed on to the manufacturer-seller of thet'inished products on which the inputs subject to input taxes hadbeen used. The refund or tax credit is authorized only if thernanufacture-seller exports the finished products and is registeredwith the BIR, as a"zere rated exporter." That, is to say, he is exemptlrom VAI and also entitled to refund or credit of i.npr,rL taxes. Onthe other hand, a rnanufacturer-seller who exports his product butis not VAT-registered is only exempt from VAT but is not entitled torefund or credit of input taxes. (a) Is this not contrar], to tlie equal

l,Aw 0lf IJn stC l'Ax^'t,toN lN ,t't-lti l,t-ilLIt,l,tNlrs

protection clause in the Constitution? (b) What non-revenue aspectof taxation can you perceive in the problem above? Explain youranswer.

4. The withholding tax law requires the withholding agent towithhold aird remit the corresponding withholding tax to the BIRduring the year a person's income is earned. A taxpayer, however,contends that since a person's income tax under the law is dueand payable only after the end of the year, the act of withholdingthe tax is an invalid payment of an obligation and is an unduedeprivation of property without due process of law. Is the taxpayer'scontention correct? What principle in taxation can you discernherein? Explain.

5. Distinguish taxation from police power as to purpose, basis,and benefits received.

6. What is a regulatory tax? Is the margin fee an example of aregulatory tax? Explain.

7. What is the distinction between a direct tax and an indirecttax? When a manufacturer passes on the percentage sales tax tothe purchaser, is he not going against the principle in taxation thattaxes are personal and may not be assigned to another person orentity? ExpIain.

8. A Iaw imposes a tax of 115 of 1% of the export price of prawnsproduced in the Philippines. The law provides that the proceeds ofthe tax shall be turned over to the Philippine Prawn GrowersAssociation, Inc. (PPGA), a non-profit private corporation registeredwith the Securities and Exchange Commission to be used by thePPGA exclusively to undertake activities that promote the growthof the Philippine prawn industry such as undertaking research onhow to improve the productivity of prawn farms in the Philippines,undertaking marketing activities to promote the export of Philippineprawns abroad and similar activities that will directly further thegrowth of the industry.

The members of PPGA constitute 90o/o of all the prawn growersin the country representing 100% of the country's prawn exports.JN, a practicing lawyer and taxpayer filed a suit with the SuprerneCourt questioning the constitutionality of the law on the ground thatthe funds raised through taxation wiII be used for a private purpose.WiIl said suit proper? Explain. (1988 Bar)

9. In 1985, Bolinao Manufacturing Corporation (BMC) sold steelbars to the Philippine Government through the Department of PublicWorks and Highways. BIVIC stiil has an uncontested Pl.0 Miltion

50 51

( I l,lN l,lliAL PItl NCI Pl,l'ls

r,,,.r!,il1)le from the Government by virtue of the sale of the steellrrrr', ln 1986, BMC overpaid the Bureau of Internal Revenuef 'ol),000 in corporate income tax, an amount not contested by theItllt l,rrt, which has remained unrefunded. For calendar year 1990,

I tN l( ' I r rrl,icipates to pay the BIR a corporate income tax of ?2.5 Millionl,r !rrl tro of an unexpected windfall income in the last quarter oft!r,ro May BMC offset all its receivables from the Government int,i,r tl]rl payment of said anticipated P2.5 Million corporate incomelir,, rn 1990? Explain. (1990 Bar)

tt), 'l'he police power, the power to tax, and the power of eminent,1,,r!urr1 are inherent powers of government. May a tax be validlyr,,,;,,,r;t,tl in the exercise of the police power and not of the power toLr " ' Il'.your answer is in the affirmative, give an example. (1991 Bar)

I l. Sometime in December 1980, a taxpayer donated to his sonI oo() s|ares of stocks of San Miguel Corporation. For failure to file;, rlorr()rl)S return on the donation within the statutory period, ther .r \ l)iryor wa-s assessed the sum of F102,000 as donor's tax, plus 25%

,rr, lurrge or F25,500 , and 20% interest or F20,400, which he paid,'n .lurte 24,1985.

( )D Aug. 10, 1986, he filed his income tax return for 1985, claiming,11(,11{ others, a deduction for interest amounting to P9,500 andr,,lr,rting a taxable income of P96,000'

on Nov. 10, 1986, the taxpayer filed an amended income taxrr,lrrrn for the same calendar year 1985, claiming therein an,r,l,l rt.ional deduction in the amount of F20,400 representing interest1,;r rr[ tln the donor's gift tax.

A claim for refund of aileged overpaid income tax for 1985 wasIr llrl with the Commissioner, which was subsequently denied.

Upon appeal with the CTA, the Commissioner took issue withtlrc CTA's determination that the amount paid by the taxpayer as

r rrl,crest on his delinquent taxes is deductible from gross income forilrirt same year pursuant to Sec. 29 (b)(1), NIRC (now, Sec' 34[B]t1l'reeT NIRC).

The Commissioner of Internal Revenue pointed out that a tax isrrot, an indebtedness. He argued that there is a fundamental,lrstinction between a "tax" and a "debt." According to the( )ommissioner, the deductibility of interest on indebtedness from a

lrcrson's income tax cannot extend to interest of taxes.

(a) What is your opinion on the argument of the Commissioner( hat, a tax is not an indebtedness so that deductibility on the interestrn taxes should not be allowed?

LAW OF BASIC TAXATION IN THE PHILIPPINES

(b) Distinguish between the legal concepts oftaxes and debts.(c) Pursuant to the National Internal Revenue Code, for interest

to be deductible what are the requirements to be met? Explain.(1992 Bar)

12. Are motor vehicie registration fees taxes or Iicense fees?Explain.

58 53

Chapter II

I,IMITATIONS ON THE TAXING POWER

INIIERENT LIMITATIONS ON THE TAXING POWER.Irrlr.rr.rrt, Iimitations are so called because they proceed from thei lr v rrirl,rrre of the taxing power itself. As stated by an authority oniu r rr ( ron, the taxing power has very distinct and positive limitations,rrirrr,' ol'which inhere in its very nature and exist whether declared,f rr(ll, rlcclared in the written constitution (1 Cooley 211).

'l'rrxution is bound in its exercise by its own nature, essential,.lrrr lrrct,crristics and purpose (In the Matter of Washington St., 69 Pa.Iit |tLil;see McFadden u. Longham, 58 Tex. 579).

'l'lrose inherent limitations on the taxing power are: (a) PublicI'ru t)ose of taxes; (b) Non-delegability of the taxing power;tr r 'l'r'rritoriality or situs of taxation; (d) Tax exernption of the{ l,ivr.rnffirert; and, (e) International comity.

A. Public Purpose of Taxes - It is the first requisite of lawfulll rrrl,ion that the purpose for which it is laid shall be upg}]l_g purpose1 I t 'ooley 212). Public purpose in taxation is important because of,rll I,lrc powers of government, that of taxation is said to be the,rlrorrgest as it can be readily employed against one class ofrrrrlrviduals in'favor of another so as to ruin one class and giverrrrlrrnited wealth'and property to another, if there is no impliedlrnr r (,ution on the uses for which such taxing power may be exercised1 t {:ooleY 398).

According to a U.S. case, "to lay with one hand the power of thefi(|vcrnment on the property of the citizen and with the other tolrr,rl,ow it on favored individuals to aid private enterprises and buildr r I r private fortunes, is nonetheless a robbery because it is done undertlrc lbrms of law and is called taxation" (Citizens Sauings & Loan.1,;s)r o/ Cleueland, Ohio u. City of Topeha, 20 Wall. tU.S.l 655, 663,:t:: L. Ed. 455).

What are the tests for determining the public purpose in a tq,x?( lnc test is whether the thing to be furthered by the appropriation,'l'public revenue is something which is the duty of the State, as aliovernment, to provide (Waples u. Maruast, 108 Tex. 5, 184 S.IY.ftt}, L.R.A. 1917 253).

Another test is whether the proceeds of the tax wiII directlypromote the welfare of the community in equal measure. The right

Ln w ol,' tlASto 't'AXAl'toN tN ,t'il t, t,llil,tpplNES

to tax depends upon the ultimate use, purpose and object for whichthe fund is raised. There is no power to tax an object which is notwithin the purposes for which governments are established(1 Cooley 384).

Included as being within the public purpose iimitation are taxesthat would raise revenue for the general expenditures of theGovernment, infrastructure and other public works, projects suchas the construction and maintenance of roads, bridges and highways,social welfare and amelioration such as charity and self-help projectsfor the infirm, destitute and handicapped persons, protection,security and defense, and similar other functions.

The promotion of the general welfare is the State's paramountconcern. Thus, a law imposing a tax on sugar produced by sugarcentrals for the purpose of using the proceeds thereof in therehabilitation and upliftment of the sugar industry is a tax leviedfor a public purpose (Lutz u. Araneta, 98 Phil. 148).

In the imposition of taxes, public purpose is presumed. Hence,it was held in a certain case that where an ordinance did notspecifically state the purpose for which the tax was to be used, it ispresumed that said tax is created for a public purpose (MendozaSantos & Co. u. Municipality of Meycauayan, et al., 94 Phil. 1047IUnrep.J).

In one case, there was a law (R.A. 1635) which required a semi-postal stamp on mail matter berween Aug. 19 and Sept. B0 of eachyear to raise funds for the Philippine Tuberculosis Society. Thevalidity of the tax was upheld by the Supreme Court because theCourt ruled that the eradication of TB as a contagious disease is apublic purpose (Gomez u. Palomar, etc., et al., L-23645, Oct. Zg, l96S).

The collection of market stall fees by a private organizationvalidly delegated does not adversely affect the public purpose of theimposition considering that the proceeds of collection thereof will bedevoted to a public use (Bagatsing, etc., et ol. u. Ramirez, etc., et al,,L-41631, Dec. 17, 1976). It should be observed, however, that underthe Local Government Code, one limitation on the taxing power ofIocal government units is to the effect that "the collection of localtaxes, fees, charges and other impositions shall in no case be let toany private person" (Sec. 130[cJ, Local Gouernment Cod.e).

-,,8. Non-delegability of the Taxing Power - In thedistribution of the powers of government into three departments,namely, Iegislative, executive and judicial, the power of taxation isexclusively legislative (51 Am. Jur.71-72). Consequently, the taxing

54 55

I,I MI'I'A'|IONS ON'IIIE'TAXING POWEIT

t,,,w(,1' as a general rule may not be delegated.( lcrtain notable exceptions to non-delegability may, however, be

rrrlrrt,ioned.

I. Under the Constitution, Congress may expressly authorizetlrr. I)resident to fix within specified limits, and subject to suchlrrrrrtations and restrictions as it may impose, tariff rates, importrrrrrl cxport quotas, tonnage and wharfage dues, and other duties orrrrr posts within the framework of the national development program,,1 llre Government (Sec. 28[2], Art. VI, 1987 Constitution).

'l'he power granted to Congress under this constitutional;,r',,vision to authorize the President to fix within specified limits,rrrrl subject to such limitations and restrictions as it may impose,trrli['('rates and other duties and imposts includes tariff rates evenl,r' rr:Vsnu€ purposes only. Customs duties which are assessed attl'r, prescribed tariff rates are very much like taxes which arelrr,tltrently imposed for both revenue-raising and regulatory purposestt i,rrcia u. Executiue Secretary, et al., G.R. No. 101273, July 3, 1992).

2. Another exception is in the case of the local taxing power.'l'lrr, Constitution on this point states: "Each local government unit',lr:rll have the power to create its own sources of revenues and toli'\,.y taxes, fees and charges subject to such guidelines and limitationsrr:; I he Congress may provide, consistent with the basic policy of local,rul,onomy. Such taxes, fees, and charges shall accrue exclusively totlr,' Iocal governments" (Sec. 5, Art. X, 1987 Constitution).

It has been held that the general principle against the delegation,,l ltrgislative powers as a consequence of the theory of separation oft,i)wers is subject to one well-established exception, namely, thatl,,11islative power may be delegated to local governments. The theory,,l non-delegation of legislative power does not apply in matters oflrrt'rrl concern (Pepsi-Cola Bottling Co. of the Philippines, Inc. u. City,tl l)u,tuan, et al., L-22814, Aug. 28, 1968).

In the case of William Lines, Inc., et al. u. City of Ozamis, et al.t L i15048, Apr. 23, 197 4), the Supreme Court ruled that the delegationol t,axing powers to Iocal governments is an exception to the principle,,1'non-delegability of legislative power. Thus, the power of the City, r l' Ozamis to impose a gross sales tax of one-half percent on the grossl rcight and fares of the cargo and passengers shipped or transported,,rrt, from Ozamis City by vessels plying between that city and other

""T;]Jitljl"l?",1r,r,^tive taxing power to rocar governments islrrstified by the necessary implication that the power to createg,olitical corporations for purposes of local self-government carries

t^w 0t' BnstcTAxAl.lON tN'l'ttll t,ilILtpptNEs

with it the power to confer on such local government agencies theauthority to tax (Pepsi-cola Bottling co. of the philipplnes, Inc. u.Municipality of Tanauan, Leyte, et al., L-Ji 156, Feb.'if, t9T6).

The court, in the above-cited case, exprained that in delegatingto local goverhments the authority to levy taxes, the state is notlimited to the exact measure of that which is exercised by itself.when it is said that the taxing power may be deregated tomunicipalities and the like, it is meant that there may be dlelegatedsuch measure of power to irnpose and collect taxes as ihe legislaturemay deem expedient. That being the case, munieipalities may bepermitted to tax subjects which, for reasons of public policy, the statehas not deemed wise to tax for more general purpos*s.

-'

_ However, despite the grant of taxing power to rocar governments,

judicial admonition is given to the effectthat the tax si levied mustbe for a public purpose, uniform and does not transgress anyc_onstitutional provision or is not repugnant to a controlling statute(Villanueua u. City of lloilo, L-Z6S2t, Dec. 28, t968).

whenever delegation of legislative power is the issue, it isimportant to know the distinction between tax legislation and taxadministration. This is so because if what is

"clelegated is tax

legislation, the delegation is invalid; but if what is invilved is onlytax administration, the non-delegability rule is not vioiated.

Every system of taxation consists of two parts: (1) the erementsthat enter into the imposition of the tax; and, (2) the steps taken forits assessment and collection (r cooley /9J). one is legllation, theother is tax administration.*". Non-delegable legislative powers, that is to say, those ihat cannot

be delegated to administrative agencies, include ihe @/selection ofthe property to be taxed; (b) determination of the prr"pl"", for whichtaxes shall be levied; (c) fixing ofthe rate oftaxation; and, (d) ruresof taxation in general (1 Cooley 1g4).

Delegable powers which are not legislative include (a) the powerto value property for taxation in pursuance of fixed ruies; (b) theequalization of assessments by a central bcdy; and, (c) collection oftaxes (1 cooley 1g5). rn short, assessment and collection are notlegislative but only administrative matters.

In brief, legislation is making the law, while tax administrationis giving effect to the law (J Coaley 196).

A case which illustrates the nature and extent of taxadministration is smith Beil & co. (phil.), Inc. u. commissioner ofInternal Reuenue (L-28271, Juiy 2b, lgTb). The petitioner in that

I,IMI'I'A'I'IONS ON THI4 TAXING POWER

, ,r,,r' rlisputed the classification by the Commissioner of importedra,rr. us "sparkling wine" which resulted in the assessment of a,l,.lrcrr,ncy tax. The petitioner contended that the taxing provision1, i, r' l.:)lal; now, Sec. 139, 1997 NIRC), aside from laying down anrrr,,rrl'l'icient and hazy standard for ascertaining the policy andI'rr t)os(, of the law, gave the Commissioner blanket authority to,lr.r'rrlr, what is or what is not sparkling wine in disregard of the,,,,rr rlrrlogability rule or the doctrine of d.elegatus non potest delegari,,', wr.llas the due process clause of the Constitution.

'l'lre Court, however, ruled that the provision in question clearly,r r rr I r rrtlisputably discloses the legislative will leaving to the officers, l,,rr'1:ed with implementation and execution thereof no more thant lr,, rrtlministrative function of determining whether a particular kind.l wrne or imitation wine falls in one class or another. In the1,,.r'lirrrnance of this function, the internal revenue otTicers are,l,,rrronstrably guided by the sound, established practice andl ,.r lr rrology of the wine industry as aged and widely dispersed as one, ,rr care to know (Srnith Bell & Co. fPhil.], Inc. u. Commission'er ofI rr t r' r' n al Reuenue, supra).

(1. Territoriality or the Situs of Taxation'l'he Situs Principle in General - Territoriality or the situs of

trrx:rtion, which means "pleqq of taxation," is a limitation on thet;rxing power. This is so because the principle is weil-recognizedI lr:rt,, however broad the power of taxation may be as to its character,,rrtl no matter how searching it is in its extent, such power is,,,,r:essarily limited only to persons, property or businesses withinrls jurisdiction; that is to say, to subjects within its jurisdiction, or,,vcr which it can exercise dominion (Shaffer u. Carter,252 U.S. 37,i4 L.8d.445,40 S. Cr. 221; Louisuille & J. Ferry Co. u. Kentucky,/,tB t/.S. 384 47, L. Ed" 513, 23 S. Ct. 463; Dewey u. Des Moines, 173U S. 193, 43 L. Ed. 665; i9 S. Cr. 379 citedin 51 Am. Jur. 457).

As aptly stated in decided cases, "all subjects over which ther;overeign power of a state extends are objects of taxation but thoseover which it does not extend are, upon the soundest principles,cxempt from taxation" (Curry u. McCanless,307 U.S. 357; 83 L. Ed.1339, 59 S. Ct. 900; 125 ALR 162; McCulloch u. Maryland, 4 Wheat

lUSl 316;4 L. Ed. 579 citedin 51 Am. Jur.457).

Some Basic Considerations Affecting Situs of Taxation

l. Protection - Protection is a basic consideration that justifiesthe situs of taxation. One authority opines that a iegal situs cannot

57

LnW Ol,' IIASIO'I'AXA'IION lN'l'll[] l,illt,lPPlNES

be given to property for the purpose of taxation where neither theproperty nor the person is within the protection of the taxing state(2 Cooley 954). For example, under our law, where the decedent atthe time of his death was a non-resident alien, his real and personalproperties which are situated outside the Philippines are not subjectto estate tax (Sec. 98,' now, Sec. 104, 1997 NIRC). However,ci,tizenship and residence are factors that justify the taxing situseven assuming that the property is situated outside the taxingjurisdiction like the Philippines. For instance, property whereversituated of decedents who are Filipino citizens, whether resident ornon-resident as of the time of death, as well as of resident aliens aresubject to estate tax (Sec. 77 in relation to Sec. 98,. now, Sec. 85 inrelation to Sec. 104, 1997 NIRC). Actually, what is subject to estatetax here is not the property, but the transfer thereof.

In the case of fire in surance couering property situq.ted in thePhilippines, q.re the insurance premiums paid thereon taxable asagainst the insurer euen though the fire insurq.ruce contruct wasexecuted outside the Philippines, and the insurqnce policy is deliueredto the irusured therein? The Supreme Court ruled that said premiumsare taxable in the Philippines because the Philippine Governrnentmust get something in return for the protection it gives to the insuredproperty in the Philippines, and by reason of such protection, theinsurer is benefited thereby (Manila Electric Co. u. Yatco, etc., 6gPhit. se).

During the time when reinsurance premiums (covering riskssituated in the Philippines), which were ceded to foreign reinsurers,were taxable to such foreign reinsurers, the Supreme Court in onecase justified their taxability on the ground that the reinsurancepremiums in question were afforded protection by the Government.Moreover, the recipient foreign reinsurer exercised rights andprivileges guaranteed by our laws (Philippine Gucr.ranty Co., Inc. u.Commissioner of Internal Reuenue, L-22074, Apr. 30, lgGS).Reinsurance premiums ceded to the foreign reinsurer abroad are,however, no longer taxable (Sec. 28[BJ[1], 1997 NIRC).

2. Double Taxation ond the Situs Limitation - Double taxationis never invalid where it is imposed by different states. Indetermining situs, it is of no importance that the property has alreadybeen taxed or is subject to tax in another state. For instance, if anon-resident Filipino like a U.S. immigrant (non-resident citizen)receives income in the U.S. (country of source), that Filipino is subjectto U.S. tax as well as Philippine tax on the same income. Both thePhilippines and the United States have the right to tax the sameincome. There are, therefore, two situses of taxation in this situation.

58 69

I,I M I'I'A'I'I()NS ON'I'HIT TAXING POWER

t\1,,r.t. rirr double taxation will be discussed in a later chapter. It shouldI,,. nol,()d that under the 1997 Tax Code, non-resident citizens, Iikel,'rlr1ri19 immigrants abroad, and non-resident aliens are subject to

ln x ()n income derived from Philippine sources'

:t. The Moxim of Mobilia Sequuntur Persona'n7 and Situs ofI,,rtrttirn - fi-ffiElGf;iflC maxim means "movables follow the

1rr,r.:ion." According to this maxim, the situs of personal property is

il,,,,lornicile of the owner. This is merely a fiction of law intendedl,,r.r'onvenience and not to be controlling where justice does not,l,,rilrrrrd it. As stated aptly, the doctrine of mobilia sequuntur

t,t,t.:ionarn is not allowed to stand in the way of taxation of personalty',

,, I lro place where it has its actual situs and the requisite legislative

l,rr.isri.iction exists (2 cooley 955-957), The maxim applies to theI rr xrrLion of personal property (Ibid').

'l'l-rus, for instance, shares of stock may have a situs lbr purposes

, ,l l r rxittion in a state in which they are permanentiy kept regardless,,1 llro domicile of the owner, or the state in which the corporation,uru; t.,rganized (51 Am. Jur. 502).

tn the case of wells Fargo Bank & union Trust co. u. collector,,f lnternal Reueruue (70 Phit.325), the Supreme Court ruled thatllr(} shares of stock left behind by a non-resident alien decedent in

r n anonymous partnership (forerunner of corporations) in thel'hilippines are subject to Philippine inheritance tax notwithstandingtlte mibilia rule. According to the Court, the mobilia rule should

.y ield to reason. The shares of stock are also taxable in the situs oft,lreir actual location, i.e., the Philippines. If the mobilia rule had

been foltrowed in that case, the shares would not have been taxed int.he Philippines since the owner died as a resident of a foreigncountry, and under Philippine law (Sec' 85, 1997 NIRC), propertiesleft behind by a non-resident alien are taxable only if the properties

are situated in the PhiliPPines.

4. Legislatiue Power to Fix situs - It has been opined that if no

constitutional provisions are violated, the power of the legislaturefo fix situs is undoubted (2 Cooley 90).

For example, our law fixes the situs of intangible personalproperty for purposes of the estate and gift taxes. Under sec. 98

1.ro*, Suc. 104, 1g97 NIRC), the following intangible properties are

considered as properties with a situs in the Philippines:

(a) franchise which must be exercised in the Philippines;

(b)shares'obligationsorbondsissuedbyanycorporationorsocied.ad, anonima organized or constituted in the Philippines inaccordance with its laws;

r t,AW Ot' llAslC'l.AXA.l.lON lN,t,ll t,i I,Hll,l l,l,lNlrs

(c) shares, obligations or bonds issued by any foreign corporationeighty-five percentum (gb%) of the business of which is iocated inthe Philippines;(d) shares, obligations or bonds issued by any foreign corporationif such shares, obligations or bonds have acquired a business situsin the Philippines; and(e) shares or rights in any partnership, business or ind.ustryestablished in the philippines.

The law further provides, however, that no tax shall be collectedunder Title III of the code in respect ofintangibr" ,"r*""iproperty:(a) if the decedent at the time oi his rleath, or the donor at the timeof the donation, was a citizen and resident of a foreign country whichat the time of his death or donation did not imposei t";;"fu" tax ofany character, in respect ofintangible personal property ofcitizensof the Philippines not residing inlnat io""igr, .irri"r, """ iul if thelaws of the foreign country oi which the decedent or donor was acitizen and resident at th€ time of his death or donation allows asimilar exemption from transfer or death taxes of "rr*"y-"iru"u"t",or description in respect of intangible personal property owned bycitizens of the Ph,ippines not reslding in trrat r*"ig., .orrrrt"y.

It will be observed from the foregoing enumeration that the variousintangible assets therein are deerned t be assets with a Brinppu*situs as determined by domestic (i.e., philippine) raw. An inierestingquestion now arises: suppose there is in intangibie airet o1 adeced,ent which is nat anl.ong those enumerated, in, tte bw, would, itbe justified to maintain tnit it is qn asset with a philippine situsbecause the "mobilia" rure d,oes not appry? or shourd, such asset beconsidered as being comprehenaea *tinin the mobf,tfairio"iotntBringing the problem into concrete terms, suppose A, anon'resident alien decedent reaves behind after his auutrr'"irl;uccount

or note payable" of, say, p100,000 collectibie from B, anindi,idualwho resides in the philippines. where is the situs of the obligation?Is it not accurate to say that under the above enumeratiorr, it 1s,.debt) has a Philippine situs because the abovecit"d lu*;;;;ks onryof corporate obligations? So, adverting to the ,ulu'r*prir-sio uniusest exclusio olterius,"it may be said that the debt has ,o riririppi.,"situs' May such obrigation, howeuer, be d.eemed. ,ru"rui by themobilia rule?

The bottom line here, therefore, is: In those cases where thesitus for certain intangibles are not categorically spelred out as inthe above situation, there is room for applying tie mobiri, rure.

60 61

I,IMI'I'A'I'I0NS ON TIIIT TAXING POWER

'l'ltr Sit.us or Territariality Principle as Applied in the Philippine' .! tt t nt!. - Broadly speaking, for Philippine tax purposes' the following,r,r1, lro the factors that could interplay in a given legal situation,r'lr.r.r.situs or territoriality is the focal question:

I Kind or classification of the tax being levied;

:l Situs of the thing or property taxed;

:t. Dornicile or residence of the person taxed; '

.l Citizenship or nationality of the person taxed;

Ir Source of the income taxed; and

(i. Situs of the excise, privilege, business or occupation beingtaxed.

'l'he above iterns may be explained through the different,,r I r r rrtional incidents below:

(r) Property Tax 'T'n considering the place at which property istrrr:rble and the governmental unit which may rightfully levy and,,,llccL the property tax, the basic factor is the situs of the property,rr rluestion. This is true whether such property is owned by ther'':;idents of the taxing state or by non-residents thereof. The

1,r iuciple applies both with respect to real property and personal

l,rrperty (51 Am. Jur. 457). The authority of every State to tax ail1,r'operty, real and personal, within its limits is unquestionabie1,\ttuings snd Loan Society u. Multnomdh County, 169 U.S. 421;l:l t,. Ed. B03). The taxing power reaches everything in the State

rv Irich can be denominated as property (Washington. Iron, Works Co.

r,. f{ing County, 20 Wash. 150; 54 Pac. 1004). ReaI estate is taxablerrr t,he State where it is located regardless of the owner's residence.A State has no power to tax real property located outside its limits(2 Cooley 969).

(Y:) Tax on. Persons - The rule is well'settled that a State maylevy a personal tax upon persons subject to the jurisdiction of itsscrvereignty (51 Am. Jur. 457). An example of a tax on persons isl,he community tax of P5.00 for individuals and ffi00 for corporations.

(c) Income Tax -In general, the crucial factors that go into thesit,us probiem in taxation when it involves income tax are(1) nationality or citizenship of the taxpayer, (2) his residence ordomicile, and (3) source of the income.

Sec. 23 of the Tax Code of 1997, provides the following generalprinciples of income taxation in the Philippines:

rI,AWO!'BASIC I'AXA'TION IN THE PHILIPPINF]S

"Except whrn otherwise provided in this Code:(A) A citizen of the Philippines residing therein is taxable

on all ilcome derived from sources within and withoutthe PhiliPPines;

(B) A nonrcsident citizen is taxable only on income derivedfrom sources within the Philippines;

(C) An indiridual citizen of the Philippines who is workingand deriving income from abroad as an overseas contractworkeris taxable only on income from sources within thePhilippnes: Prouided, That a seaman who is a citizen ofthe Philippines and who receives compensation forservicesrendered abroad as a member of the complementof a vessel engaged exclusively in international tradeshall belreated as an overseas contract worker;

(D) An alien individual, whether a resident or not of thePhilippines, is taxable only on income derived fromsources 1yithin the Philippines ;

(E) A domesiic corporation is taxable on all income derivedfror[ sources within and without the Philippines; and

(F) A foreigr corporation, whether engaged or not in tradeor business in the Philippines, is taxable only on incomederivedfrom sources within the Philippines.,'

For Philippine tax purposes, the kind of tax imposed is sometimesa crucial factorin determining whether the situs of taxation is in aparticular taxing jurisdiction or not. In one case involving a foreignairline but whose airplanes do not carry passengers to and from thePhilippines asithad no landing rights here, the Court ruled that forincome tax purposes, said airline is taxable on the irrcome realizedfrom the sale ofiis tickets in the Philippines tfrrough a sales office;but at the samelime, the Court observed that the airline would notbe subject to anybusiness tax inasmuch as the absence of any landingrights would rnean that it is not engaged in the exercise of anyprivilege whichcould be subject to the business or privilege tax(Commissionerof Internql Reuenue u. British Ouerseas AirwaysCorp., et al., G,l,Nos. 65773-74, Apr. 30, 1987).

It should benoted that under the present law, an internationalcarrier doing business in the Philippines is taxabLe at two andone-half percenl(ZYzYo) on gross Philippine billings (GPB) "derivedfrom carriage ofpersons, excess baggage, cargo and mail originatingfrom the Philippines in a continuous and uninterrupted flight,irrespective of itre place of sale or issue and the place of payment of

l{ 62 63

I,IMI'I'A'I'I()NS ON 1'HI]'I'AXING POWEIi

f lr,. tr, lrcl or pussugc document: Prouided, That tickets revaiidated,

=*, l,,r rr1,,r,rl irtrcl/or indorsed to another international airline form part,,1 r lr,. ( lr',rss l'hilippine Billings if the passenger boards a plane in al,,,rt ,,f sroirtt, in the Philippines: Proulded further, That for a flight*lrr, lr ,,r'iginates from the Philippines, but transshipment oftrH,iLi,,nti(,r. takes place at any port outside the Philippines on anotherg1lrrr,., orrl.y the aliquot portion of the cost of the ticket correspondinglH tlrr, 1r,11 I'lown from the Philippines to the point of transshipment

=lrrrll l,,r-rrr part of the Gross Philippine Billings" (Sec. 28 tAlt?ltal't4,t, Nlll(:).

r,l) llx<:ise or Priuilege Taxes' Where the tax that is beingIlrl',r,r(,(l is a tax upon the performance of an act, enjoyment of aIrf r I r l('ti(', or engaging in an occupation, or what is sometimes knownry1 inr i.x(:ise or privilege tax, the situs of taxation is the place inolrr, lr Ilrc act is performed or where the occupation is engaged in.!1rr rrr llrr,case of sales tax imposedby a city government, for instance,I 1,, r r I I r rr g in one case is that it is the place where the sale is perfectedlrnll ( ()lsummated that determines the situs of taxation (AlliedIttr,',t,1 ()o., Inc., et al. u. City Mayor of Manila, et al-, L'40296'i\",, :'1,1984).

ll rs noteworthy that the legislative power to fix the situs oft,rrirtrorr includes the power to fix the place of taxation between,lrll,,r.rrt, places in the same state (2 Cooley 959-60).

lrr local taxation, as in the case of the sales tax (which is an,.i, r',, or privilege tax), the situs of the sale or transaction (i.e., wheretl,, ,,rrlt, Lakes place) is not necessarily the situs of taxation, unlessIrr tlrr. situs of the sale the taxpayer maintains a branch office in,r lr|i lr t,vert, 100% of the sale is taxable by the city or municipality,r lrr.r'r,t,[re branch is located (Sec. 150, Local Gouernment Code)-

I I t,he situs of the sale is one where no branch office is maintained,tlr, il ll07o of the sale goes to the local government unit (city or,,r,,,'rr:ipality) where the taxpayer's principal office is located andI 1,,. r.r.rrrainrng 7Oo/o is taxed by the local government unit where theLr \ t)il.yer maintains its factory (Ibid.). In the latter case, therefore,,,rtrr:i o['the sale is not a limitation on the taxing power of the localr,,,\.(,r.r)ment unit where the taxpayer establishes its principal officerr rr,l llrctory.

,l'lre principie that situs of taxation is determined by the situs oftlr,'r;rrle may in some cases bow down to statutory rules depending,,rr wlurt situs policy the taxing power at a given point desires to

t,rr! r;uc. The rule of situs oftaxation for business taxes is discussedrr rr()rc detail in a later charrter.

LAW OF BASIC TAXA1'ION IN'I'IIE I'TlII,IPPINES

On the basis ofcourt rulings, it is necessary to point out that thesitus of the sale for tax purposes is not the place where the contractof sale is perfected but the place of its consummation. Hence, in thecase, for example, of the additional sales tax on the sale of fuels andoils, said tax may not be applied to deliveries outside the municipalitysince the consummation of the sale is determined by the delivery ofthe things vrhich are the subject matter of the contract (The SheltCo. of the Philippines, Ltd. u. Municipality of Sipocot, CamarinesSu,r, 105 Phil. 1263 [Unrep.J).

In one case, however, the Supreme Court ruled that the city cantax the sale of matches where shipments or deliveries are madedirecbly to customers outside the city provided the sales are bookedand paid for in the city to a carrier for shipment to the buyer.Generally, delivery to the carrier is delivery to the buyer (PhilippineMatch. Co., Ltd. u. City of Cebu, et al., L-30745, Jan.. 18, 1975).

In situations involving brokerage as in the case of a broker, forinstance, the rule is such that a lclcal broker is taxable in this countrywith respect to the commissions received by it for negotiating andconsummating the sale in Japan of products belonging to a Philippinecorporation (A" Soriano Y Cia u. Collectoi'of Internal Reuenue, l0lPhil. 504). What is important here is that the broker's tax is notbeing levied on the sale ofthe goods in Japan but on the taxpayer'sbrokerage services in the Philippines. Incidentally, brokers aresubject to the 10% value-added tax (Sec. 108, 1997 NIRC).

I). Exemption of the Government from Taxes - It seemsthat as a matter of public polrcy, property of the State and of itsmu nicip a I subdivisions.devoted tp gevernmept-use +a nd rr urpo ses isgeneraily deemed to be exempt from taxation although no expressprovision in the law is made therefor (51 Am. Jur.503). Taxexemption of government entities and the political subdivisions ofthe State seems to be a well settled principle (Ibid.).

The exemption frorrr taxation of the Government and its politicalsubdivisions might also emanate from a statutnry grant. Thisis obviously in conformity with the abovementioned principle.For instance, under Sec. 28(b)(8)(B) of the Tax Code (now,Sec. 32[B][7][bJ, 1997 NIRC) income derived from any public utilityor from the exercise of any essential goyernment function accruingto the Government or any political sutrdivision i.s exempt frorr incometax. Also, under the Local Government Code, real property ownedby the Government or any of its political subdivisions is cxrrrnpt fromreal property tax unless the beneficial use thereol'is grirrrted for

64 65

I,IMI'I'i\'I'IONS ON TTIE TAXING POWER

,,,rr:rrtle-ration or otherwise to a taxable person (Sec. 234[a], Local| : | ) t tt, t' tL metll COde).

ll is significant to note that the Consitution does not contain,, , r 1, 1r rovision granting tax exemption to the Government. Obviously,r lr,' r tirson for this is that the Government's exemption from taxes is,, rr rrrllerent limitation on the State's taxing power.

Notwithstanding the immunity of the Government from taxes,tl,r' lrrinciple is also weII recognized that the Government may taxrt:;r,ll'. In one case, the Supreme Court held that there is no, ,,rrst,itutional limitation on the power of Congress to tax the Armedl'rrr:os of the Philippines if it wishes to do so (Bisaya LandI'rttnsportation Co. Inc. u. Collector of Internal Reuenue, 105 Phil.t:i:tB [Ururep.]).

[,'or example, a contractor who undertakes a job contract for the( l,vcrnrn€rrt is not justified in claiming that it should be exemptl.orn the payment of the contractor's tax simply by arguing that if1

,: r.y rnent thereof were insisted upon, he would just shift the tax over ,

t,r l,he Government; and that, as a consequence, the GovernmentI r; r.y ing the tax as part of the purchase price of the contractual services

' ,.rrdered would be taxing itself.

E. International Comity - More often than not, states find itrrrutually advantageod6 for themselves to create self-imposedrlstraints on their taxing powers especially with reference to theproperties of foreign governments within their territorial domain.Itcciprocity lies at the root of this limitation for it cannot be deniedt lrat lvith reciprocity located at the bottom line, harmonious andp roductive relationships among the various states can be maintained.

An authority on taxation has this to say on the subject ofi nternational obligations: "International obligations concominantwith our acceptance ofthe principles ofinternational law as part ofour law demand that certain representatives of foreign statesstationed and property of such foreign states found within ourl.erritory be exempted from taxation x x x" (Matic, Taxation iru thel'hilippines, p. 63).

It is significant to note that Sec. 12, Art. II of our Constitutiondeclares that the Philippines "adopts the generally acceptedprinciples on international law as part of the law of the land andadheres to the policy of peace, equality, justice, freedom, cooperationand amity with all nations."

I,AW OI,' I]ASIC] TAXA'I'ION IN'I'II I' PIIII,IPPINI'S

The above observation seems to be reflqted in the followingprovision of the Local Government Code on the c\mmunity (formerly,

\"Sec. 159. Exemptions - The following are\exempt from

the community tax; \(1) Diplomatic and consular representatives;

xxx."

Y CoNSTITUTIoNAL LIMITATIoNS oN THE TAXINGPOWER. The following provisions may be said to be the limitationsprescribed in the Constitution on the taxing power of theGovernment:

(a) Due process clause, whether it be substantive or procedural(Sec. 1, Art. Iil);

(b) Equal protection of the laws (Sec. 1, Art. III);(c) Freedom of speech and of the press (Sec. 4, Art. III);(d) Non-infringement of religious freedom and worship (Sec. 5,

Art. III);(e) Non-impairment of contracts (Sec. 10, Art. AD;(0 Non-imprisonment for debt or non-payment of poll tax

(Sec. 20, Art. III);(g) Rule requiring that appropriations, revenue and tariff bills

shaII originate exclusively from the House of Representatives(Sec. 24, Art. VI);

(h) Uniformity, equitability and progressivity of taxation(Sec. 28[1], Art. VI);

(i) Limitations on the congressional power to delegate to thePresident the authority to fix tariff rates, import and exportquotas, etc. (Sec. 28[2], Art. VI);

(j) Tax exemption of properties actually, directly and exclusivelyused for religious, charitable and educational purposes(Sec. 28[3], Art. VI);

(k) Voting requirement in connection with the legislative grantof tax exemption (Sec. 28[4], Art. VI);

(I) Non-impairment of the jurisdiction of the Supreme Court intax cases (Secs. 2 a.nd 5, Art. VIil); and

(m) Exempiion from taxes of the rerrenues and assets ofeducational institutions, including grants, endowments,donations and contributions (Sec. 4[3] and [4J, Art. XIV).

bt) 67

r,tMl'r'A'r'roNS 0N 1'lili'l'AxlNG PowEIt

'l'hcrc are, however, certain provisions in the Constitution which,rrc r)t)t actually limitations on the taxing power but which have al,,.rrring on taxation. Such provisions are:

(rr) Constitutional requirement on the subject and title of bills(Sec. 26[1], Art. VI);

(b) Power of the President to veto any particular item or itemsin an appropriation, revenue or tariff bill (Sec. 27[2],Art. VI);

(r:) Provision which requires that no money shall be paid out ofthe Treasury except in pursuance of an appropriation madeby law (Sec. 29[1], Art. VI);

(d) Frovision against the appropriation of public money orproperty for the benefit of any church, sect or system ofreligion, etc. (Sec. 29[2], Art. VI);

(c) Provision which mandates that money collected on a taxievied for a public purpose shall be paid out for such purposeonly (Sec. 29[3], Art. VI); and

(f) Provision regarding allotments to Iocal governments (Sec. 6,

Art. X)"

('ONSTITUTIONAL LIMITATIONS EXPLAINED

A. Due Process of Law - Sec. 1, Art. III of the Constitution;,r'ovides in part that "(n)o person shall be deprived of life, Iiberty,,,r' property without due process of law." In the tax sphere, therelrrrve been occasions when the Supreme Court ruled on the,,,rrstitutionality of certain taxing measures where due process oflirw was the focal question. In the case, for instance, of. Kapatiranntt mgct Naglilinghod sa Pamahalaan ng Pilipinas u. Tan, etc. (G.R.Nos. 81311,81820,81921 and 82152, June 30, 1988), the Court ruledI lnt due process was not violated rr"hen the VAT la',v (8.O. 273) waspromulgated because there was no grave abuse of discretion incidentl, its promulgation. The Court also pointed out that petitionersllriled to show that 8.O.273 was issued capriciously and whimsicallyor in an arbitrary or despotic manner by passion or personal hostility:;ince it appears that a comprehensive study of the VAT was madelrtrfore 8.O.273 was issued.

It should be noted in this connection that when tlier:onstitutionality of a legislative taxing act is questioned on thellround that there is a denial of due process, an actual case orr:ontroversy must first exist before the courts can be called upon to

LAW OI.' IJASIC'I'AXA1'ION IN 1'II T,.] PIIII,IPI]INI'S

rule on said issue.

In the case, for instance, of Tolentino ,r/n, Secretary of Finaruce,et al. (G.R. No. 115455, Aug. 25, 7994), and companion cases, theCourt said:

"x x x There is, however, no justification for passing uponthe claims that the law (i.e., Expanded Value Added Tax Lawor R.A. 7716) x x x denies petitioner's right to due process.x x x Indeed, the absence of threat of immediate harm makesthe need for judicial intervention less evident andunderscores the essential nature ofpetitioner's attack on thelaw on the ground (of) denial of due process x x x as a mereacademic discussion of the merits of the law. For the fact isthat there have been no notices of assessments issued topetitioners and no determinations at the administrativelevels of their claims so as to illuminate the actual operationof the law and enable us to reach sound judgment regardingso fundamental questions as those raised in these suits."Adverting to its previous decision in the VAT case of Kapatiran

ng mga Naglilingkod sa Pamaholaan ng Pil.ipinas, Inc., et al. u. Tan,elc. (G.R. No. 81311, June 30, 1988), the Court further said:

"At aII events, our 1988 decision in Kapatiran case shouldhave laid to rest the questions now raised against the VAT.There, similar arguments made against the original VAT Law(Executive Order No. 273) were held to be hypothetical withno more basis than newspaper articles which this Court foundto be hearsay and without evidentiary value. As RepublicAct No. 7716 merely expands the base of the VAT systemand the coverage as provided in the original VAT Law, furtherdebate on the desirability and wisdom of the law should haveshifted to Congress."

f( Wh"r, a tax turns out to be of a confiscatory nature, such animposition could very well be considered as being violative of thedue process principle. In one case, the Court ruled that the dueprocess clause in the Constitution may be invoked where a tax statuteis so arbitrary that it finds no support in the Constitution. An obviousexample is where the same can be shown to amount to confiscationof property. Classification for taxation must not be prornpted by aspirit of hostility or discrimination that finds no support in reason(Reyes, et al. u. Almanzor, et al., G.R. Nos. 4983g-46, Apr. 26, 1gg1).

Again, in another case (Slson., Jr. u. Anchetq,, etr:., t:l al., G.R.No. 59431, July 25, 1984), the Court held that the modifiedschedular income tax whereby individual income was classified into

68 69

I,IMI'I'A'IIONS ON'I'HU'I'AXING POWER

tl,r,',' rlil'l'crent classes under different tax rates (compensation,lrrr ,rrrr,r;s/ot,her income and passive investment income) is not a denial,,1 ,lrrr. l)rocess because there is no proof of arbitrariness in theuul,r':lti0rt of tax rates.

Irr uuc case, it was held that due process is not violated if a

iir,\., r'nrncntal body like the Fiscal Incentives Review Board (FIRB),,. lr r,.lr was tasked with the duty of recommending the restoration ofrrr r r,xt'mptions previously abolished under presidential decrees, isli,.;,,1,,t1 by the Minister (now, Secretary) of Finance, who at the sameI r n | !, r:i t,[re very same person who approves or disapproves the FIRB'sr,'r ,rnrrlcndation provided no two opposing or conflicting interests,r,. urvolved, Iike the case of the restored tax exemption of al,,rrlrcular taxpayer where it appears that there is no interest that1 , r'xrstiDg which is in conflict with the interests of such taxpayer1ll,tt'r'rl.a u. Macaraig, Jr., etc., et q.I., G.R. No. 88291, May 31, 1991).

( )rr the other hand, the Court ruled in the case of Villegas u. Hiut'tut,ntl Tsai Pao Ho, et al. (L-296a6, Nov, 10, 1978), that there is a,l, rrrrl of due process on account of the passage of an ordinance intl,,' ( lily of Manila which imposes a permit fee of F50.00 on aliens asir r ,rrtlit,ion to employment or engaging in any business or occupation,. l , ,r'c it appears that under said ordinance, the City Mayor of Manila, , ,,r lr I withhold or refuse issuance of such permit at wiII. The Court1,, , r rrl ctl out that aliens, once admitted in the Philippines, cannot be,1,.1,r'ived of life without due process of law and this guaranteerrr,.l11slss the means of livelihood.

ln the case of Prouince of Abra u. Hernq,ndo, etc., et q.l. (L-49336,\,r1i.31, 1981), the Supreme Court held that due process was not

,,lr::r,rv€d when the trial court, in an action for declaratory relief,,1,., 1;rred that certain property owned by the Roman Cathoiic Church,,, llrrngued, Abra was tax-exempt under the 1973 Constitution, it.' 1r;itrapiqg that no court hearing was conducted thereon.

iiimilarly, in another case (Commissioner of Customs u. CTA, et,,1 , G.R. No. 70648, July 31, 1987), the Court also held that therrrporter of goods is deprived of procedural due process when

',, t:alled "alert notices" (i.e., valuation of goods made by Finance,\liuches abroad) were not presented in the Customs protestlrr.oceedirrgs in the Bureau of Custorns as we]i as in the Court of Tax\trr1reais when the case was on appeal therein. Inciclentally, the "alert,,,l,ices" contained a higher valuation of the irnported goods thanllrt,vah.lation indicated in the knport Entries covering the goods in, lr tr"Stion.

rL,AW Ot' llASlC,l'Axn'l'lON lN'l'lIl,' PlIll,llrPlNl,ls

B. Equal Protection of the Law - The Constitution doesnot

only speak of non-deprivation of due process but in Sec. 1, Art lllthereof, it also emphatically ordains that "x x x nor shall any person

be denied the equal protection of the laws."

With particular reference to taxation, it has been aptly stated

that the power of the State to make rejggll\le and naJu.pal

classifications for the purposes of taxation is unquestioned and such

claGrTidations may relate to the subject of taxation, the kind ofproperty, the rates to be levied or the-amounts to be raised, andthe

methods of assessr,nent, valuation and co]lgction' ,Such power to

classify in matters bf taxation GBaid to be broader than some other

exercises of Iegislative power, entitled to presumption of validityand will not, as a rule, be interfered with by the judiciary in theabsence of a clear showing of unreasonableness, discrimination or

arbitrariness.However, the classification must be based upon real and

substantial differences between the persons, property or privileges

and those not taxed must bear some reasonable reiation to the object

or purpose of legislation or to some permissible governmental policy

or legitimate end of governmental action (see Tomas P. Matic,Jr.,Taxation. in. the Philippines, Vol. I, pp. 79'80).

It is recognized that Congress can make distinctions and

classifications. Thus, it can, for example, classify taxpayers into"calendar year" and "fiscal year" taxpayers for income tax purposes

(Manila Times Pubtishing Co., Inc. u. Commissioner, CTA Case No.

2263, Dec. 17, 1973).

* tt " equality of taxation rule, therefore, is not violated ifclassifications or distinctions are made as long as the saililr-dTiIed'on reasonable and substantial differences. For instance, there is areasonabi6-basis for imposifif lower rates on the foreign'sourcedincome of non-resident citizens as evidenced by the preferential or

Iower rates of 1%,2% and 3% because these are the people whoearnforeign currency abroad which are remitted here, as compared to

the resident citizens who have to pay the ordinary graduated rates(Sec.21[a] and [b], 1977 NIRC).

It should be noted that the preferential tax rates are no longer

applicable on income of non-resident citizens abroad' Under theTax Reform Act of 1997, non-resident citizens are taxable only on

income derived from sources within the Philippines. Hence,

beginning Jan. 1, 1998, income of non-resident citizens frorn foreign

sources are not subject to Philippine tax (Sec. zafA][1J[a] and' [b],1997 NIRC).

1n 71

I,I MI'IA'I'IONS ON'I'H!] TAX]NG POWER

our jurisprudence is replete with rulings on the equal protectionr'lirus(,of the Constitution as it relates to taxation. In the following,-uric,s, our Supreme Court has held that the equal protection principlerr':rr rrot violated:

l. 'l'he value-added tax (VAT) law does not discriminate unduly,,1,r nlsl customs brokers who are subject to said tax. The exclusion,,1 ::irirl brokers from the exemption granted to professionals underrl.r' lt)3(r) of the Tax Code is justified by the fact that customsl,r,lirrs differ from tax-exempt professionals considering that the,r, lrvit,ies of customs brokers (like those of stock, real estate and,r, rrrrgration brokers) partake of the nature of a business rather than,, 1,r'trl'ession (Kapatiran ng nt.ga Naglilingkod sa Pamahalaan ngI'tIr1tinas, Inc. u. Tan, etc., supra).

:l The State has the inherent power to select the subjects ofI ;r xrrl,ion and inequalities which result from the singling out of one1,,rr I.rcular class for taxation or tax exemption infringed no, ,,rr;l,it,utional limitation. Consequently, the schedular income tax* lr r,'lr imposes graduated rates from 0% lo 35% without deductionsrrrr lr)rnpensation income of individuals (except their personal and,r,l,lrl,ional exemptions for qualified dependent children), and a rate,, lr{'rne of from \Yo to 60% on business and other income with,l,,,lrrr:Lions does not violate the rule on equal protection since therer, r,o infirmity if classifications are made to rest on substantial,lr',trnctions (Sison, Jr. u. Ancheta, etc., et al., supra).

;l The remission or condonation of taxes due and payable to the,,, lrrsion of taxes already collected does not constitute unfair,1,,,, r'rrnination. Each set of taxes is a class by itself and the law,,,,rrlrl be open to attack as class legislation only if aII taxpayers1,, l,rrrging to one class were not treated allke (Juan, Luna Subdiuision,l,t, r,. Sarmiento, 91 Phil. 371).

,l A tax on an o'installation manager" is not discriminatory justlr.r r u SC at the time said tax was imposed, there was no other personr', I lrt, locality who exercised such occupation. The tax is and will be,,1,;rlrr:irble to any person or firm who exercises such calling or,,, ( r rl)r Lion designated as installation manager (Shell Co. of P.1., Ltd.r, 1',rricr, etc.,94 Phil.387).

t, A law (R.A. 3843) which imposes a preferential franchise taxr rrl,. rrl 2%o on a particular franchise grantee while other franchiseg r ir r r l .cs are subject to 5% is not violative of the equal protection or,,,1rr:rlil,y of taxation rule in the Constitution. The legislature hasllr'' nrherent power not only to select the subjects of taxation butrrl,,rr trr grant tax exemptions (Commissioner of Internal Reuenue u.

*

l,AW OI l]ASl(l'l'AXn'l'l()N lN'l'lI lil I,lllt,ll,l,lNIJS

Lingayen Gulf Electric Power Co., In,c., l,-ZSf f l, Aug. 4, lgSS).6. The fact that the taxpayer is the only sugar central or refinery

in the municipality where the tax ordinance is enacted does not makesaid ordinance discriminatory (Victortas Miiling Co., Inc. u.Muruicipality of Victorias, L-21183, Sept. 2f , l96S). The reason forthis is that since other refineries to be established in the future wouldalso be taxable, no singling out of the taxpayer to its disadvantagehas ever taken place.

7. There is no discrimination or class legislation if a statuteauthorizes the city of Manila to levy occupation taxes whereas thatsame authority is withheld from other cities and municipalities. Itis not for the courts to decide what cities or municipalities should beso authorized for that is a matter for the legislature to decide(Pun.salaru u. Municipal Boord of tlte City of Manilu, gS phil. 46).

8. A tax levied on boarding stables for race horses is notdiscriminatory where it appears that no such tax is imposed onboarding stables for other types of horses (Manila Race HorseTrqiners Ass'n, Inc. u. De lq Fuente, 88 Phil. G0).

In the following cases, how,ever, the Supreme Court ruled thatthe equal protection rule has been violated:

a{ A tax ordinance levied an export tax on centrifugai sugarmilled by the Ormoc Sugar Co., rnentioning only ;hifiom#ny byname. The ordinance does not satisfy the requisites of reasonableclassification. Although Orrnoc Sugar Central was the only sugarcentral existing at that time, the ordinance is defective because evenif a similar company is later set up, it cannot be subject to the taxsince the ordinance specifically points to Ormoc as the one to betaxed (Arrtoc Sugar Co. trnc. u. Trea.surer of Orrnoc City, et al.,L-23794, Feb. 17, 1968).

/. There is discrimination where a local tax was imposed. on"agents or consignees of outside dealers" in softdrinks without saidtax being levied also on local dealers. The classification of such"agents and consignees" who are taxable and "local dealers" who areexempt is not based on substantial distinction (Pepsi-Cola BottlingCo. ofrthe Phili,ppines, Iruc. u. City cf Butuan, et al., supra).

/. A" emoloyment perrnit fee imposed on alien joLr applicantsregardiess of the nature of employment (whether casual, perrnanent,part-tirne or fuil-time, or J"owly paicl employee or highly paidexecr"itive) is constitutionally invalid because it fails to consider validsubstantial differences in situation arnong the aliens requirecl to payit. classification should be i:ased on real. and substantial differences

72 73

I,IMI'I'A'I'IONS ON THD TAXING POWER

lr ir v r r r g rr reasonable relation to the subject of legislation (Villegas u.

t lr rr ('lt,i.ong Tsai Pq.o Ho, et al., supra)..[. A local ordinance which levies an ad, ualorem tax on motor

,,'[rr,:lcs registered in Manila without also taxing those which arer,.1,ril,crcd outside the city but which enter the city and use its streets,,, , ru;irrrrally violates the rule on the equality of taxation (Association,,1 ('ustoms Brokers, Inc., et al. u. The Municipal Board, et al.,,t ; l'lti,L. 107).

#. Where it appears that Sec. 109 of the Tax Code (before itsrrrrlrlied repeal) which required skimmed (non-fat) milkr r r rr r r tr f,acturers to place a warning sign on their products stating that',Irrrrmed milk is "not suitable for feeding infants less than one (1)1','rrr'" is enforced only against manufacturers of evaporated filled,,,rlh and noL against makers of condensed skimmed milk like: :l M ILAC, SMA or BREMIL, such action is discriminatory and is,' ,l,,rrial of equal protection of the law (Vera, etc., et al. u. Cueuas,t .i:|(;93-94, May 31, 1979).

Like in the question of alleged denial of due process, judicial, r , I r ,rvention is also unnecessary in the absence of a factual setting,,r ;rn actual controversy which is engendered by the issuance of an,.;:;r$sment against the taxpayer (see Tolentino u. The Secretary ofl,'trtunce, et al., supra),

C. Freedom ofSpeech and ofthe Press - Sec.4, Art. III ofttr,' (lonstitution provides: "No law shall be passed abridging thel r.cdom of speech, of expression, or of the press, or the right of the1 ,,', rple peaceably to assemble and petition the government for redress

,,1 grievances."

The focal question now arises: When is a tax said, to be violatiue,,f stress freedom or freedom of thought and expression?

To epitomize, the Supreme Couq! held in its decision on the'''l'otentiio E-VAT"

"uru, ,uprr, thafihere isjurlailgsnj of press

lrcedom and freedom ofthought and expression ifa tax is levied in,rrd€r to suppress this basic right of the people under the( lonstitution.

Along with other issues in that case, the constitutionality of thel,lxpand.ed Value-Added Tax (E-VAT) under R.A. 7716 was assailed.'l'he Court, however, citing American cases upheld the E-YAT'svrr [it*ity. The court differentiated the disputed E-VAT f,rom the taxltrat was levied in the case of Grosiean u. Americun Press Co. (2$7

tl.S. 233; 80 n . Ed. 660 [1936]), where the discriminatory character

I,AW OF I]ASIC 1'AXA'I'I()N IN'I'III' I'IIILIPPINES

of the tax was considered as an abritlgcrncnt of the freedom of thepress and of expression.

Acting on the premise that, like others, u newspaper publishermust pay equitable and non-discriminatory taxes on his business(citing Associated Press u. NLRB, 301 U.S. 103, 132, 81 L. Ed. 953,1961 [193U), the Court pointed out that in the Grosjean case, supro,the law imposed a license equivalent to 2o/o of the gross receiptsderived from advertisements only on newspapers with a circulationof more than 20,000 copies per week. Because the tax was not basedon the volume of advertisement alone, but was measured by theextent of its circulation as well, the law applied only to the thirteenlarge newspapers in Louisiana, Ieaving untaxed four newspaperswith a circulation of only slightly less than 20,000 copies a week and120 newspapers in question. It was well known that the thirteennewspapers had been critical of Senator Huey Long, and the long-dominated legislature of Louisiana responded by taxing what Senatorl,ong described as the "lying newspapers" and by imposing on them"a tax on lying." The effect of the tax was to curtail both their revenueand their circulation.

As the U.S. Supreme Court noted, the tax was "a deliberate andcalculated device in the guise of a tax to limit the circulation ofinformation to which the public is entitled in virtue of theConstitutional guarantees" (297 U.S. at 250,80 L. Ed. at 669). Thecase, said the Court, "is a classic illustration of the warning that thepower to tax is the power to destroy."

Incidentolly, ffie! a busine.ss license be required for the sale ordistributian of pri:nted materials like newspapers? Anegative answeris in order.

The U.S. Supreme Court, in the case of People u. Korins (38bU.S. 2d 474 W975)) said: "x x x (T)o apply an ordinance requiring abusiness license to be obtained before a person could sell newspapersin the streets would be to impose a prior restraint on press freedombecause a newspaper is not in the same category as a pineapple or asoap powder, or a pair of shoes whose sale may be conditioned onthe possession of a business license."

Speaking further on the nature of press freedom in relation totaxation, particularly as it refers to license taxes imposed mainlyfor regulation and taxes, which like the VAT, are imposed purely forrevenue purposes, the Court said that the imposition of a Iicensetax is unconstitutional because it lays a prior restraint on said right.The license might apply to the sale of goods but to extend it to thepress would of course be unconstitutional (Philippine Airlines, Inc.

74 75

I,IMITN'I'I()NS ON THtI TAXING I'OWt'IT

r, 'l'h( Secretary of Finance, et al., G.R. 115852, Aug. 25, 1994, citingfrlrtrtlo<'k u. Pennsyluania, 319 U.S. 105, 87 L.Ed, 1292, 1943).

It, is important to note in this connection that the E-VAT lawrll A. 7716) requires the payrnent of the surn of P1,000 (now, F500),,,, rr nnual registration fee on all persons subject to the value-addedr:rx (Sec. 236[8], 1997 NIRC)

WiLl this fee not constitute a restraint on press freedom or, fortltttl matter, the freedom of worship?

'l'lre Court, again in the "Tolentino E-VAT'case, ruled in therr,,11rrt,ive. According to the Court, this fee is not imposed for the,.r,,rt:ise of a privilege but only for the purpose of defraying part ofllrt t:ost of registration. It is, thus, a mere administrative fee, onerrul, irnposed on the exercise of a privilege, much less a constitutionalr r1,lrt,.

D. Non-Infrihgement of Religious Freedom - Sec. 5,

\rt. tII of rhe Constitution provides that "(n)o law shall be mader,'specting an establishment of religion or prohibiting the free

',r('rcise thereof. The free exercise and enjoyment of religious1'rol'ession and worship without discrimination or preference shalllur'cVer be aliowed. No religious test shall be required for the exercise,,1' t:ivil or political rights."

In the case of American Bible Society u. City of Manila (101 Phil".ttl(;), the Supreme Court ruled that a municipal license tax on the,rrrlo of bibles and religious articles by a non-stock, non-profit,,rrssionary organization at a little profit constitutes a curtailment,,1 religious freedom and worship which is guaranteed by the( '()nstitution. The Court heid that an ordinance of the City of Manila,,vlrich imposed a license fee on those engaged in the business ofli,.ncral merchandise could not be applied to the appellant's sale ofl,rlrles and other religious literature. The Court relied on Murdockr, ['ennsyluania, ante, in which it was held that as a license fee isI'r xccl in amount and unrelated to the receipts of the taxpayer, theIrr:r:nse fee when applied to a religious sect was actually beingrrrrltosed as a condition for the exercise of the sect's right under the( lonstitution. For that reason, it was held that the license fee"r.ostrains in advance those constitutional liberties of press andrt'ligion, and inevitably tends to suppress their exercise" x x x"

What the Court has ruied regarding press freedom, as earlier,lrscussed, could very well be applied also to reiigious freedom" Asrr lrt,ly stated by the Court in the "Tolentino E'VAT" case:

I,AW OT IJASIC'I'NXN'I'ION IN'I'I IId I'IIILIIJI'INI1)S

"What has been said above also disposes of the allegationsof the PBS that the publication or importation of books andreligious articles, as well as their printing and publication,likewise violates freedom ofthought and conscience. For asthe U.S. Supreme Court unanimously held in JimmySwaggart Ministries u. Boqrd of Equalization, the FreeExercise of Religion Clause does not prohibit imposing agenerally applicable sales and use tax on the sale of religiousmaterials by a religious organization."

Note, however, that as in press freedom, a Iicense tax wouldconstitute a restraint on the freedom of worship as guaranteed inthe Constitution.

In the Philippine Airlines case, the Supreme Court ruled thatthe application of a license tax to religious groups, such as theJehovah's Witnesses, in connection with the latter's sale of religiousbooks and pamphlets, is unconstitutional. According to the Court:"As the U.S. Supreme Court put it, it is one thing to impose a tax onincome or property of a preacher. It is quite another thing to exacta tax on him for delivering a sermon."

Obviously, in conjunction with this constitutional limitation,Sec. 26(e) and (g) (now, Sec. 30[E] and [G] of the 1997 Tax Code),exempts from the income on non-stock corporation organized andoperated exclusively for religious, charitable, scientific, athletic orcultural and social welfare purposes, no part of the income of whichinures to the benefit of any member, organizer or any specific person.However, notwithstanding said exemption, the income of suchorganizations from any activity conducted for profit or from any oftheir property, real or personal, regardless of the disposition madeof such income, is subject to tax under the Tax Code.

In connection with the above-cited codal provision regarding thetaxabiiity of listed organizations under Sec.26 (now, Sec. 30, 1997NIRC), on their income from activity conducted for profit, or fromany of their property, real or personal, regardless of the dispositionmade of such income, the Secretary of Justice, in his Opinion. No.45, dated March lA, 1958 (cited in the cases of Union Chwrch ofManila, Manila Polo Club, CTA Case No. 293, Aug. 31, 1959;XauierSchool, Inc., CTA Case No" 1682; Congregaci,an de la Mission de SqnVicente d,e Paul, CTA Case No. 1486, Act. 14, 1968), opined thatconsidering the history of the provision in question, it would seemthat the statute as now amended. has restricted the tax exempti"onof religious and other organizations therein specified only to theextent of withdrawing the exernption with respect to the income

76 lt

I,I MI'IA'I'I()NS ON'I'I{I''|AXING I'OWER

rr';rlizcd from (a) the productive use of their properties, real org,,,rsor)al, e.g., rents, dividends or interest; and, (b) from profitablelrrrsincss pursuits, which properties or businesses are not essentiallo or necessarily connected with their religious, charitable or,,rlrrr:i.rtional purposes, as the case may be.

'l'hus, in an isolated sale of a church lot being used for reiigioust)rrrposes, the proceeds or net income of which was used to buy;rrrother lot, as a new site to build a church, income from the1r'rrnsaction was considered merely incidental to its religioust)rrrposes. The property was not acquired for speculation or as anrrrvestment to be eventuaily sold primarily for monetary gain.

It should be noted that the BIR has consistently ruled thatp;rssive investment income such as interest income from Philippine('rrrrency (now, ony currency) bank deposit and yield or any otherrrronetary benefit from deposit substitutes, trust funds and similar;u'rangements of religious corporations and.other organizations,,rrumerated in Sec. 26 (now, Sec. 30 of the 1997 Tax Code), are subjectto 2O%a final withholding tax imposed under Sec. 2a(B)(1) of the same( lode.

fn. Norr-Impairment of Contracts - Sec. 10, Art. III of the( lonstitution provides that "(n)o Iaw impairing the obligations ofcontracts shall be passed." The nature of this limitation is aptly,l rscussed. as follows:

-

t=& ,-p"t" tr t" w""tqd- to deprive of strength. Hence,to im-p;irilEi6ii[alion of a contract is to alter or change theterms or effect of the contract, and thus in contemplation oflaw, to weaken the position or rights of one or all of the partiesto it. A law, which changes the terms of the contract bymaking new conditions, or changing those in the contract, ordispenses with those expressed impairs its obligations. It isnot important that the impairment is but slight, if it existsat all, if there is any impairment, the provision of theConstitution is violated and the courts will interfere. x x x"(Matic, Taxatiotl in the Philippines, Vol. I, p. 62, citingWatson on the Constitution of the U.5., pp. 797-798).

Along this rule, it was held in the case of. Casanoua u. Hord(B Phil. 125) that where a mining concession was granted under all,oyal Decree and where it appears that under said decree no otherl.axes except those mentioned therein shall be imposed on miningand metallurgical industries, the levy of a tax on said mining claimplus an qd ualorem tax on mineral output under a subsequent law

l,nW Ol,' IIASI()'l'AXA'l'lON lN'l'll l,) l)tltLll,l'INUS

(Act 1189) constitute an impairrnent ol'contract because a miningconcession is a contract.

44ru non-impairment rule does not apply to public utilityfrdnchises. According to Sec. 11, Art. XII of the Constitution, nopublic utility franchise or right shall be granted except under thecondition that it shall be subject to amendment, alteration or repealby the Congress when the common good so requires. Accordingly, inthe case of Cagayan Electric Power & Light Co., Inc. u. Comm,issionerof Internal Reuenue (G.R. No. 60126, Sept. 25, 1985), the SupremeCourt ruled that non-impairment may not be invoked in the case ofa public utility franchise grantee. This is so because under Sec. 8,Art. XIV of the 1935 Constitution and Sec. 5, Art. XIV of the 1973Constitution (now, Sec. 11, Art. XII, 1987 Constitution), thelegislature can impair a grantee's franchise since a franchise issubject to amendment, alteration or repeal by the Congress whenthe public interest so requires.

In said case, the validity of the removal of the grantee's exemptionfrom income tax, which was provided for in its franchise, was upheldby the Court. The same ruling was also made in the case of RadiaCommunications of the Phils., In"c. (ltCPI) u. Commissioner ofInternal Reuenue (G.R. No. 60547, July 1, 1985 [Resolution]), wherethe Court held that in the revocation of a franchise grhntee's incometax exemption, there is no question as to the public interest involvedinasmuch as the country needs increased revenues.

The nature and extent of the legislative power to alter or amenda public utiLity franchise is succinctly explained by the SupremeCourt in thf"iotentino E-VA?"case, supra, as follows:

"It is }iilE6l"olte d that amendment of petitioner'sfranchise may only be made by special law in view of $ 24 ofP.D. No. 1590 (N..B.; PAL's franchise exempts it from all taxes,except corporate income tax or 2%o tax on gross receipts),which provides:

'This franchise, as amended, or any section orprovision hereof may only be modified, amended orrepealed expressly by a special law or decree thatshall specifically modify, amend, or repeal thisfranchise or any section or provision thereof.'

"This provision is evidently intended to prevent theamendment of the franchise by mere implication resultingfrom the enactment of a later inconsistent statute, inconsideration of the fact that a franchise is a contract which

78 79

l,tMt'IA'l'toNS 0N THU',I'AXING l'OWhllt

cun be altered only by consent of the parties. Thus, in ManilaIlailroad Co. u. Rafferty (40 Phil. 224 [19191), it was heldthat an Act of the U.S. Congress which provided for thepayment of tax on certain goods and articles imported intoLhe Philippines, did not amend the franchise of plaintiff,which exempted it from all taxes except those mentioned inits franchise. It was held that a special law cannot beamended by a general law.

"In contrast, in the case at bar, Republic Act No. 7716expressly amends PAL's franchise (P.D. No. 1590) byspecifically exempting from the grant of exemptions from theVAT PAL's exemption under P.D. No. 1590. This is withinthe power of Congress to do under Art. XIII, $ 11 of theConstitution, which provides that the grant of a franchisefor the operation of a public utility is subject to amendment,alteration or repeal by Congress when the common good sorequires."

In the "Tolentino E-VAT" case, su,prct,, one of the petitioners wast lrc Chamber of Real Estate and Builders A-ssociation, Inc. (CREBA).t )rro issue that was raised was whether the imposition of the VAT,,rr sales and leases ofreal estate by virtue ofcontracts entered into1,r'ior to the effectivity of the Iaw would violate the non-impairment,,1'r:ontracts rule in the Constitution. In resolving the issue in favor,,1't,he VAT, the Court said:

"x x x It is enough to say that the parties to a contractcannot, through the exercise of prophetic discernment, fettert,he exercise of the taxing power of the State. For not onlyrure existing laws read into contracts in order to fix obligationstus between parties, but the reservation of essential attributesof sovereign power is also read into contracts as a basicpostulate of the Iegai order. The policy of protecting contractsagainst impairment presupposes the maintenance of agovernment which retains adequate authority to secure thepeace and good order of society."

ln another case, the Court of Tax Appeals held that the rule onr',,rr-impairment is not disregarded with the imposition of a highert r r rate on an existing franchise, it appearing that said franchiserv;rs gr&DtBd with the express understanding and upon the conditiontlrrrl, it shall be subject to amendment, alteration and repeal (Phil.l'rntr(,r & Deu. Co. u. Commissioner, CTA Co,se No. 1152, Oct. 31,lt)ti[t).

I,AW Ot.' IIASIC'I'AXA'I'I0N IN'I'III' I'H II,IPPINIJS

F. Non-Imprisonment for l)ebt or Non-Payment of PollTax - sec. 20, Art. III of the constitution provides that "(n)o person

shall be imprisoned for debt or non-payment of a poll tax"'

Debt, as covered by the constitutional guarantee, means any

Iiability to pay money arising out of a contract, express or implied(Tan Cang u. Stewart, 42 Phil. 809). The prohibition againstimp.isonment for debt was brought about by the force of public

opirriol which looked with abhorrence on statutes permitting thecruel imprisonment of debtors. The constitution seeks to preventthe use or tnu power of the state to coerce the payment of debts.

The control of ihe creditor over the person of his debtor has been

abolished on humanitarian considerations. one should not be

punished on account of his poverty. Moreover, the Government is

not a proper party to private disputes. It is not called upon to render

its aid to one-who deems himself aggrieved by imprisoning the otherfor failure to pay his debts (Ganaway u. Quintin, 42 Phil' 805)

A potl tax (or personal or capitation tax) is a tax of a fixed amount

on individuals residing within a specified territory, whether citizens

or not, without regard to their property or the occupation in whichthey may be engaged (51 Am. Jur. 660). The residence tax (now, thecommunity tax certificate) is in the nature of a poll tax. Theprohibition against imprisonment for non-payment of poll tax isdi.t"t"d by a sense of humanity and sympathy for the plight of thepoorer elements of the population who cannot even afford to pay

iheir ced.uto or poll tax (i.e., community tax certificate) (Vicente G.

Siruco, Philippine Political Law, 1L'h Ed.' p- 682).

G. Origin of Appropriation, Revenue and Tariff Bills -

sec. 24, Art. VI of the constitution provides that "(a)II appropriation,revenue or tariff bills, bilis authorizing the increase of the publicdebt, bills of local application and private bills shall originateexclusively in the House of Representatives but the senate maypropose or concur with amendments."

With reference to the extent of the Senate's power under thisconstitutional provision to propose or concur with amendments to

revenue bills that should originate from the House ofRepresentatives, the Court, in the "Tolentino E'VAT" case, supro,

said:

"x x x (A) bill originating in the House may undergo such

extensive changes in the Senate that the result may be arewriting of the whole. x x x At this point, what is importantto note is that, as a result of the senate action, a distinct bill

l

I,I M I'I'A'I'I0NS ON'I'Hh]I'AXING IJOWER

rrray be produced. To insist that a revenue statute - and notonly the bill which initiated the legislative processcrrlminating in the enactment of the law - must substantiallybe the same as the House bill would be to deny the Senate'st)ower not only tr "9nl! tg!"!!_y&aU9?lllsilsJbutAso"to propose amentlments." It would be to violate the.o-"ffiof the two houses of congress,and in fact make the House superior to the Senate."

H. Uniformity, Equitability and Progressivity of Taxationli'c. 28(1), Art. VI of the Constitution provides: "The rule of taxation,lrrrll be uniform and equitable. The Congress shall evolve a

l' rltirglllp-sYstem of taxation-"Ilniformity in taxation means that aII taxable articles or kinds

,rl lrroperty of the same class shall be taxed at the same rate. It doesrr,l, mearr that lands, chattels, securities, income, occupations,lnrrrchises, privileges, necessities and luxuries shall be assessed attlrc s&rl€ rate. Different articles may be taxed at different amountsg,r'ovided that the rate is uniform on the same class everywhere with,r ll lreople at aII times.

A tax is uniform when it operates with the same force and effectrlr overy place where the subject of it is found (Churchill, et al. u.r'oncepcion, 34 Phil. 969). Consequently, a tax of P2.00 per squarerrrr,t,er on all electric signboards all throughout the Philippines';rrtisfies the requirement of uniformity (Churchill, et a.l. u.t' r t rr,cepcion, supra,).

Uniformity in taxation is further defined in one case as that inrv lr ich the tax levied "operates with the same force and effect in every1,|;rce where the subject of it is found. Uniformity means that all1,r'operty belonging to the same class shaII be taxed alike"(( tommissioner of Internal Reuenue u. Lingayen Gulf Electric Powerl'rt., Inc., supra).

The Supreme Court, in the case of ' Tan u. Del Rosario, Jr., et al.t( l.R. No. 109289, Oct. 3, 1994), had occasion to rule on the question;rr; to whether or not the "Simplified Net Income Tax System" or theIINITS (R.A. 7496) violated the rule of uniformity in taxation. Thept'Litioner in that case alleged that uniformity was violated because,rnrler the SNITS, the law, for tax purposes, singled out businessproprietors and professionals differently from corporations andl,rrrtnerships. The taxabtre income of individual proprietors ofl,rrsinesses and professionals was taxed at rates of frorn 3o/o to 3Oo/o,

wlrile that of corporations and partnerships is taxed at the unitary

81

LAW 0t' llASto'l'nxA't'toN rN't'll t, t,tilt,lPPtNES

rate of 35%.

The Court ruled that rhe constitutional mandate has not beendisregarded. According to the Court, uniformity of taxation, likethe kindred concept of equal protection, merely requires that allsubjects or objects of taxation, similarly situated are to be tneatedalike both in privileges and liahiiities.

In the case of Villanu.er'rz u. City of lloilo, supra, the Court heldthat a local tax on tenerue,nt houses does not violate the rule ofuniformity and equality of taxation even if the tax in question is notaiso levied on other classes of buildings in the locality where suchtax is imposed. And fina[1;,., the Court also ruled that uniformrty isnot disregarded if a tax is ievied on admissions to cinema, theaters,vaudeville companies, therrtrical shows and boxing exhibitions butdoes not tax other places e{'amusernents such as race tracks, cockpit,s,cabarets, concert halls, circuses and other places of amusernent(Eastern Theatrical Co., Inr:" u. Alf,tnso, etc., et al., 83 Phil. 852).

Uniformity in taxation, r"hich means geographical unif,ormityonly, is also underscored. ir: fhe realm of local taxation. In Art. 218of the RuIes and Regulations Implementing the Local GovernmentCode, it is mentioned that; "'uhe uniformity required (in local taxatior:)is only'within the territorial jurisdiction of a province, cify,municipality or barangay." Taxation is said to be equitable when .itsburden fails on those better ai:le to pay (Reyes, et al. u. Almanzor, etal., supra).

Progressiuity of taxati,on. is also mandated in the Constitulion.Our income tax systenl is one goud example of such progressivit.ybecause it is buiit on the principle of the taxpayer's ability to pay.Taxation is progressive when its rate goes up depending *n Ll:eresources of the person afl'ected (Reyes, et al. u. Almanzor, el ul.,supra).

Incidentally, the Supreme Court in the celebrated "Tolen,tinoE-VAT" case, supra., declined to rule on the constitutionality of lheExpanded Value-Added 'Iax Law (R.A. 77L6) for lack of any"empirical" or factual data with regard to uniformity, equality arudprogressivity of taxation.

Howevern the Court elaborated further on the concept ofprogressivity as mandated in Sec. 28(1), Art. VI of the Constitution,as may be gleaned from an excerpt of its decision in the followrngparagraph:

"Indeed, regressivity is not a negative standard for courtsto enforce. What Congress is required by the Constitution to

82 8tl

I,IMI'I'A'II0NS ON THTT TAXING POWI'R

rlrr is to'evolve a progressive system of taxation.' This is arlrrt,ctive to Congress, just like the directive to give priorityt, t,he enactment of laws for the enhancement of humanrlrgnity and the reduction of social, economic and politicalrrrr,tlualities'(Art. XIII, $1), or the promotion of the right to',lrrality education' (Art. XIV, $1). These provisions are putr rr Lhe Constitution as moral incentives to legislation, not as

I rrtl icially enforceable rights."'l'lrr: Supreme Court has more to say on the question of

rr.1,r.r.ssivit! in taxation particularly as it relates to the VAT. Thet ', , rr rl said:

"The Constitution does not really prohibit the impositionol" indirect taxes which, Iike the VAT, are regressive. Whatr l, simply provides is that Congress shall 'euolue a progressivesystem of taxation.' x x x Indeed, the mandate to Congressr; not to prescribe, but to evolve a progressive tax system.( )t,herwise, sales taxes, which perhaps are the oldest form ofrndirect taxes, would have been prohibited with thelrroclamation of Art. VIII, $17(1) of the 1973 Constitution,l'rorn which the present Art. VI, $28(1) was taken. Sales taxesrrre also regressive.

"Resort to indirect taxes should be minimized but notlvoided entirely because it is difficult, if not impossible, toavoid them by imposing such taxes according to the taxpayer'sability to pay. x x x" (Philippine Airlines, Inc. u. Secretaryof'Finuruce, et at., G.R. No. 115852, Oct. 30, 1995 [Resolution]).

I. Delegation of Legislative Authority to Fix Tariff Rates,lrrrport and Export Quotas' etc. - Sec' 28(2), Art. VI of the(',rrstitution provides that "(t)he Congress may, by law, authorizetlrc President to fix within specified limits, and subject to suchlrrnitations and restrictions as it may impose, tariff rates, import:r rrd export quotas, tonnage and wharfage dues, and other duties orr r r r prosts, within the framework of the national development program,l'Lhe Government."

It has been held that the President may increase tariff rates as

;rrrthorized by law even for revenue purposes only. Sec' 28(2),r\ rt. VI of the Constitution expressly grants permission to Congressro authorize the President "to fix within specified limits and subjectio such limitations and restrictions as it may impose, tariff ratesi x x and other duties or imposts x x x." Customs duties which are,,,rsessed at the prescribed tariff rates are very much like taxes which

fl1711

;,I,AW OI.' BASIC'I'AXA'II0N IN 1'HE PHILIPPINDS

are imposed for both revenue-r&ising and regulatory purposes(Garciau. Executiue Secretary, et al., G.R. No. l0lZTS, July S, 1gg2).

J. Tax Exemption of Properties Actually, Directly andExclusively Used for Religious, Charitable and EducationalPurposes - Sec. 28(3), Art. VI, of the Constitution provides:"Charitable institutions, churches and parsonages or conventsappurtenant thereto, mosques, non-profit cemeteries and all lands,buildings and improvements actually, directly, and exclusively usedfor religious, charitable, or educational purposes shall be exemptfrom taxation."

To what kind of tax does this exemption apply?In the case of. Lladoc u. Commissioner of Internal Reuenue, et ol,

(L-19201, June 16, 1965), wherein petitioner assailed the donor,sand donee's gift taxes on the cash donation for the church building,the supreme court ruled that the abovementioned constitutionarprovision which grants tax exemption applies only to property or

,

realty taxes assessed on such properties used directly, actually andexclusively for religious, charitable and educational purposes.

It would seemr however, that under existing law, gifts made infavor of religious, charitable or educational organizations wouldnevertheless qualify for donor's gift tax exemption in light of theprovisions of Sec. 94(a) (now, Sec. 101[A]ISJ, 1ggf NIRC)which reads,as follows:

"Sec. 101. Exemption of Certain Gifts. - The followinggifts or donations shall be exempt from the tax provided forin this Chapter:

"(A) In the Case of Gifts Made by a Resident. -xxxx

"(3) Gifts in favor of an educational and/or charitable,religious, cultural or social welfare corporation, institution,accredited nongovernment organization, trust orphilanthropic organization or research institution ororganization: Prouided, howeuer, That not more than thirtypercent (30%) of said gifts shall be used by such donee foradministration purposes. For the purpose of this exemption,a'non-profit educational and/or charitable corporation,institution, accredited nongovernment organization, trust orphilanthropic organization and/or research institution ororganization, is a school, college or university and/orcharitable corporation, accredited nongovernment

\ 84 85

LIMI'I'A'I'I()NS ON THT] TAXING POWER

orgunization, trust or philanthropic organization and/orroscarch institution or organization, incorporated as arronstock entity, paying no dividends, governed by trusteeswho receive no compensation, and devoting all its income,whether students'fees or gifts, donations, subsidies or otherlirrms of philanthropy, to the accomplishment and promotionof the purposes enumerated in its Articles of Incorporation."On this score, in Commissioner of Internal Reuenue u. Court of

.|1'1teuls, et al. (G.R. No. 115349, Apr. 18, 1997), the Supreme Court,,vlrrlc sustaining the cancellation of the deficiency contractor's tax,r,,:rr.ssment against therein private respondent Ateneo de Manilallrriversity, acknowledged that "x x x the Court of Tax Appealsrr.r'rrrately and correctly declared that the 'funds receiued by Ateneo,1,. Muruila Uniuersity are technically not a fee. They may howeverlrrll as gifts or donations which are tax-exempt' as shown by private, ,,r;lrondent's compliance with the requirement of Section 123 of thel.lrrl,ional Internal Revenue Code 1now, Sec. 101(A)(3), 1997 NIRCIl,roviding for the exemption of such gifts to an educationalr r u;t.itution."

'fhe same tax exemption privilege is also granted to donations,,r;rrle by a nonresident who is not a citizen of the Philippines1:;,'c. 94[b][2],'now, Sec. 101[B][2], 1997 NIRC).

To be entitled to tax exemption under the Constitution, is proof,,f trctual use for the tax-exempt purpose necessary?

In the case of Prouince of Abra u. Hernando, etc., et al. (L-49336,Arrg. 31, 1981), the Supreme Court ruled that actual use is necessary.,\r:cording to the Court, to be exempt under the 1973 Constitution,lrrnds, buildings and improvements of religious and charitablerrrstitutions must not only be exclusively but also actually and,lrrectly used for religious and charitable purposes. This is the,liff'erence between the 1973 Constitution and the 1935 Charter whichrcryuires only that the property be exclusively used for the purposesr rrdicated.

Hence, in that decided case, the Court ruled that it was not in;rccordance with the Constitution for the lower court to declare in:rn action for declaratory relief that the properties of the Roman( )atholic Church in Bangued, Abra were tax-exempt without first,:onducting a hearing thereon to determine the factual question of:rr:tual use and direct use.

It is worthy of note, in this connection, that the 1987 Constitution:rlso employs the berms "actually, direc'iiy and exclusively" to

rLAW O!' I]ASIC TAXA'I'I()N IN'fTII] PHII,IPPINES

emphasize the importance of use of the property for tax exemptionpurposes.

It has been held that the test of exemption from taxation is theuse of the property for the purposes mentioned in the Constitution(Abya Valley College, Inc. u. Aquino, etc., et al., L-39086, June 15,

f98}, It is important to note also that for purposes of tax exemption,

{'usej/overrides "olqpgrs,bid' such that if property, although actuallybrrtfed by a religious, charitable or educational institution, is actually

++Ae{=fo" a rp*S5g*mglpg1p_osg, the exemption from tax of saidproperty vanishes.

Consequently, in the Abra Valley College case, supra, the rulingthat the lease by the school of the lower portion of its school buildingto a commercial establishment known as the Northern MarketingCorporation, which is not even incidental to the educational functionsof such school, is outside the scope of the constitutional grant of taxexemption and is, therefore, subject to real estate tax on a pro rata(one-haifl basis. Incidentally, the second storey of the school buildingwhich was used for educational purposes (as residential quarters ofthe School Director's family) is tax-exempt.

For tax exemption purposes, however, the term "exclusively used"is not Iimited to total or absolute use for religious, charitable oreducational purposes. If a property is incidentally used for theaforementioned purposes, it is clear from decided cases that taxexemption may still subsist.

Thus, in the case again of Abra Valley College, supra, ttreSupreme Court held that where the main building of an educationalinstitution is used both as classrooms for its high school and coilegestudents as well as residence of the School Director and his family,the tax exempt character of such property remains despite the factthat it is used as such, as the same may be justified as being onlyincidental or complementary to its main or primary purpose ofproviding education to its students. But, as earlier pointed out, thelower portion of the school building is taxable since its use isunrelated to the school's educational functions.

Several parallel rulings may be cited on the question of taxexemption that is granted under this constitutional provision. Inthe case of The Roman Catholic Bishop of Nueua Segouia u. ProuincialBoard of llocos Norte (51 Phil. 352), the ruling is to the effect thatthe tax exemption extends to a vegetable garden in an adjacent Iotand another lot formerly used as a cemetery. Exclusive use considersincidental use also. Hence, the exemption of the convent includesnot only the Iand occupied by the building but also the adjacent

I'86 87

I,IMI'I'A'I'IONS ON 1'[tF]'IAXtNC POWER

r,,rr'(l('n devoted to the incidental use o1. the parish priest as well astlr,. i,rtlging place incidental to religious t'unctions.

'l'lrc phrase "exclusively used for educational purposes" waslrrr tlrt,r clarified in the case of llerrero, et al. u. Quezon City Board,,/ rri)-(,ssment Appeals (L-15270, Sept. .30, 1961) and Commissianer,'1 ln.lerna,l Reuenue u. Bishop of the Missionary District of theI'lttltJttrtine Islonds, etc., et al. (L-I94a5, Aug. 31, 1965), to include,r rr) lhe case of a hospital, a school for training nurses, home andlr,r,r ;u)g facilities for interns, resident doctors, superintendents and,rtlrt.r' rrlerlbers of the hospital staff, recreational facilities, etc.

r\ct-'ording;4ir. the decision in said case, the admission of pay, rrrr.rrts doe{gg#detract from the charita$9_g"fug-racter of the hospitalrl rr /l of it*Ir{!p are devoted.sxclusively to the m4intenance of therrr,,iiI u!io+.as a public charity. The fact that the hospital which is a, l,:rrilable institffijl- admits pay patients does not bar it from,lrrrrnirrg that it is devoted exclusiveiy to benevolent purposes if itr r,t){,itrs that the income derived from pay patients is devoted to the,nrl)r'ovement of the charity wards which represents almostlrv,r t,hirds of the total bed capacity aside from "out charity" patients\\, l)() come only for consultation.

K. Voting Requirement in Connection with theLlgislative Grant of Tax Exemptions - Sec. 28(4), Art. VI of the( 'r,rrstitution provides#No law granting any tax g;pmption shall beti:rri!ii;rd without the concurrence of a majority of(rliltt

" members of(',,rtHreSS." Ll ***-.-..-

F)uppose a law authorizes the refund of a tax already collected,,r ;ir'rtnts the deduction of certain items of expenses for income taxtru rir()ses. Con,siderin.g that refunds af taxes and deductions partah,e,f tltc ruatLLre of exemptiorus, is this ttating requirentent applicable'l

It is a settled rule that refunds partake of the nature of,'xt,mptions (Aguilar u. Commissianer, CA-G.R. No. SP- 16432,illrrr. 30, 1990). Condonation oftaxes already paid or yet unpaid are;rlr+o in the nature of tax exemptions (Surigao Consolida.ted Miningt'o., Inc. u. Collector of Internal Reuenue, et al., L-14878, Dec. 26,t e63).

L. Non-Impairment of the Supreme Court's Jurisdictionirr Tax Cases - The pertinent provisions of the Constitution are:

Sec. 2, Art. VIII: "The Congress shall have the power todefrne, prescribe, and apportion thejurisdiction ofthe various

LAW OI.' I}ASI(]'I'AXA'I'I0N I N'I'IIIJ PTIII,IPPINI,JS

courts but may not deprive the Supreme Court of itsjurisdiction over cases enumerated in Sec. 5 hereof."

xxxSec. 5, Art. VIII: "The Supreme Court shall have the

following powers:

xxx"(2) Review, revise, reverse, modify or affirm on appeal

or certiorari as the law or the Rules of Court mayprovide, final judgments and orders of lower courtsin:

xxx"(b) all cases involving the legality of any tax,

impost, assessment or toll, or any penaltyimposed in relation thereto."

xxx

M. Tax Exemption of Revenues and Assets, IncludingGrants, Endowments, Donations or Contributions toEducational Institutions - Sec. 4(3) and (4), Art. XIV of theConstitution provides:

xxx"(3) All revenues and assets of non-stock, non-profit

educational institutions used actually, directly, andexclusively for educational purposes shall be exempt fromtaxes and duties. Upon the dissolution or cessation of thecorporate existence ofsuch institutions, their assets shaII bedisposed of in the manner provided by law.

"Proprietary educational institutions, including thosecooperatively owned may likewise be entitled to suchexemptions, subject to the limitations provided by law,including restrictions on dividends and provisions forreinvestments.

"(4) Subject to conditions prescribed by law, all grants,endowments, donations or contributions used actually,directly, and exclusively for educational purposes shall beexempt from tax."It appears, however, that under Sec. 27(B) of the Tax Code of

1997, proprietary educational institutions shall pay a tax of tenpercent (10%) of their taxable income, except those covered by

88 89

l,lM I'l'A'l'IONS ON'II1l.l TAXING POWER

I irrlrsr,r:tion (D) of said section. Non-stock and non-profit educationalrrr:rlrlrrtions and government educational institutions are exemptlr,rrr income tax under Sec.30(H) and (I), respectively, of the 1997'l'rr x ( lode. Notwithstanding the provisions for income tax exemptionrrrrrlt'r'said Sec. 30 of the Tax Code, the law provides that income ofrr' lr rr l,cver kind and character of said organizations from any of theirl,r,rlrr,rties, real or personal, or from any of their activities conductedl,,r' lrrofit, regardless of the disposition made of such income, shall1,,'rrtrbject to tax imposed under the Tax Code.

Analyzing the aforequoted provisions, it is c1ear, therefore, thatl,r,plietary educational institutions cannot be categorized as tax-.rurrpt under the Tax Code, and that their tax-exempt status1ru;r;runing all the requisites for exemption are present) will have to1,,'lrrsed only on the Constitution.

on the basis of the opinion of the Secretary of Justice (OpinionN,. 130, S. of 1987), the following legal points on the aforequoted,,rrrstitutional provisions may be considered important:

1. The exemption from taxes and duties granted to "non-stock,rrorr-profit educational institutions with respect to their revenuesrrrrrl assets took effect upon the ratification of the Constitution onl|r'lrruary 2, 1987 because the rule that a constitutional provision,lr.r:laring certain properties as exempt from taxation is seU-executing,,ntl proprio uigore exempts the property specified and does not,I lrt'refore, need a legislative enactment to put it into effect.

2. Legislation is not essential in order to prescribe ther'('(luirements for exemption such as who would qualify as "non-stock,rron-profit" institutions and the meaning of "actually, directly, and,,xclusively used," as these things can be the subject of executive,rnd judicial interpretation. The legislature is not, however,precluded from providing for reasonable regulations in the exercise,rf'the right to exemptions.

3. Tax exemptions, however, of proprietary educationalrrrstitutions require prior legislative implementation since the use,,[' the permissive tetm "rnay" in the provision gives Congressrliscretion to determine whether or not assets and revenues ofproprietary educational institutions should likewise enjoycxemptions from taxes.

It is pertinent to add, however, that this particular exemptionl,o proprietary educational institutions will apply only after Congresslras laid down the conditions for its enjoyment. In short, the taxr.xemption here is not self-executing.

r I,AW OF BASIC I'AXA'I'I()N IN 1'[tI.] PIIILIPPIN!]S

4. All grants, endowments, donations or contributions usetlactually, directly and exclusively for educational purposes are tax-exempt where the donee-school is non-stock, non-profit.

xxxThe pertinent portion of Sec. ga(a)(3) (now, Sec. t0t[A], lggr

NIRC), clearly provides that for purposes of this exernptic,n, a'non-profit educational andlor charitable corporation, institr.rtion,accredited non-government organization, trust or philanthrr:picorganization and/or research institution or organization' is a schoo),college or university, trust r:r crharit,able corporation, accreditednon-government organization, trust or philanthropic organizationand/or research institution or organization, incorporated as anon-stock entity, paying no dividends, governed by trustees whoreceive no compensation, and devoting ail its income, whetherstudents' fees or gifts, donations, subsidies or other forms oiphilanthropy, to the accomplishment and promotion of the purpo$esenumerated in its articles of incorporation.

It should be noted that in the implementing regulatir:ns,Department of Finance (DOn Order No. 137-82, dated Dec. 16, 1gB?,this point has been emphasized:

"1. The exemption herein granted refers to internal revenuetaxes and customs duties imposed by the NationalGovernment on all revenues and assets of non-stock.non-profit educational institutions."

xxxIn a nutshell, the following are some of the highlights ol'tire

DOF Order governing the tax exemption of this particular class cfeducational institution:

1. The exemption is not only limited to revenues and assetsderived from strictly school operations like income from tuition andother miscellaneous fees such as matriculation, library, ROTC, etc.,fees, but it also extends to incidental income derived from canteen.bookstore and dormitory facilities.

2. In the case, however, of incidental income, the facilitiesmentioned must not only be owned and operated by the school itselfbut such facilities must be located inside the school campus.Canteens operated by mere concessionaires are taxable.

3. Income which is unrelated to school operations 1ike incomefrom bank deposits, trust funds and similar arrangements, royalties,dividends and rental income are taxable.

90 91

T,IMITA'I'IONS ON THE TAXING POWER

4. The use of the school's income or assets must be in consonancew rt.lr [he purposes for which the school is created; in short, use must1,,. sc:hool-related, like the grant of scholarships, faculty development,,',rtrrblishment of professorial chairs, school building expansion,lrlrrrrry and sports facilities, etc.

Supposing income from tuition is inuested for an unrelatedt'rtrpase like placements in the money market, is the inuested incomet,rtuble? The invested income is not taxable, but the earnings,,.rrlized thereon, Iike interest on the placement, is the one that isrrrxrrble (DOF Order No. 137'87).

It may be, however, that further clarification was made by thellrrreau of Internal Revenue (BIR) on the issue of whether or notr r r I,grest income of non-stock, non-profit educational institutions from('rrrrency bank deposits or any monetary benefit from deposit:rrr[stitutes as well as from trust funds and similar arrangements,, r'l subject to the twenty percent (20%) final withhoiding tax imposed,rrrtler Sec. 24(e)(1), (now, Sec. 24[B][1], 1997 NIRC) considering the,,,rrstitutional provision that aII revenues and assets of non-stock,,,ltrcational institutions used actually, directly and exclusively for,.rlucational purposes are exempt from taxation'

In 1996, the BIR issued a revenue regulation to the effect thatr r r light of the provision in Sec. 4(3), Art. XIV of the 1987 Constitution,r nlerest income of non-profrt, non-stock educational institutions froml,rrnk deposits shall be exempt from the 2oo/o ftnal withholding taxl,rovided that said income are actually, directly and exclusively usedli,r educational purposes, subject to compliance with the conditionssct forth in said regulation.

In Comntissioruer of Internal Reuenue u. Court of Appeals, et al.t(l.ll. No. 124043, Oct. 14, 1998), the Supreme Court declared thatI lre exemption from payment of income tax under Sec. 4(3), Art. XIV,,1' the consti.tution may be granted to an educational institutionlrrovided that it proves with substantial evidence that (1) it fallsrrnd.er the classification as a non'stock, non-profit educationalinstitution; and, (2) the income it seeks to be exempted from taxationis used actually, directly and exclusively for educational purposes.'['he bare allegation that it is a non-stock, non'profit educationalinstitution is insufficient to justify its exemption from the paymentoI income tax.

As used in the aforesaid constitutional provision, and to debunkt,he claim of therein private respondent YMCA for tax exemption as

Irn educational institution thereunder, the supreme court furtherheld that -

T,AW OF BASIC TAXATION IN l'HT] PHILIPPINES

"x x x The term 'educational institution' or ,institutionof learning' has acquired a well-known technical meaning,of which members of the Constitutional Commission aredeemed cognizant. Under the Education Act of 1982, suchterm refers lo schools. The school system is synonymous withformal education, which 'refers to the hierarchicallystructured and chronologically graded learnings organizedand provided by the formal school system and for whichcertification is required in order for the learner to progressthrough the grades or move to the higher levels. x x x

xxx"Furthermore, under the Education Act of 1g82, even

non-formal education is understood to be school-based andprivate auspices such as foundations and civic-spiritedorganizations are ruled out. It is settled that the term'educational institution,' when used in laws granting taxexemption refers to a 'x x x school, seminary, college oreducational establishment."'

OTHER CONSTITUTIONAL PROVISIONS RELATED TOTAXATION

1. Constitutional Requirement on the Subject and Title of Bills- Sec. 26(1), Art. VI of the Constitution provides: "Every bill passedby congress shall embrace only one subject which shall be expressedin the title thereof."

In the case of Tan u. Del Rosario, Jr., etc., et al. (G.R. No. 10g2gg,Oct. 3, 1994), the constitutionality of the SNITS, or the ,,SimplifiedNet Income Tax System" (R.A. 74g6) was assailed on the groundthat House Bill No. 343t4, which later became R.A. 24g6, is a"misnomer" since, although the titie speaks of the net income tax,actually what the law levies is the gross income tax, considering thenumber of disallowed deductions therein as compared to the lawexisting before its passage. The Court, in upholding the validity ofSNITS, ruled that the net income tax system is still retained. underthe new law. The number of deductions heretofore allowed mayhave been significantly reduced. However, this is neither discordantwith nor opposed to the net income tax concept, for the fact is,according to the Court, various deductions which are by no meansinconsequential continue to be well provided under the new law.

In the "Tolentino E-VAT" case, supro, the E-VAT, or theExpanded Value-Added Tax Law (R.A. 7716) was also questioned

T,IMITA'I'IONS ON THE TAXING POWER

,,rr (lro ground that the constitutional requirement on the title of al,rll was not followed. One of the petitioners in that case, the| 'lr r lippine Airlines (Philippine Airlines, Inc. u. Secretary of Finance,, t ,t1., G.R. No. 115852, Aug. 25, 1994), contended that the removal,,1 rts tax exemption under its franchise, P.D. 1590, is not containedrrr .it.her House Bill No. 11197 or Senate BiII No. 1630, which finally, rrlrrrinated in R.A. 7716.

In resolving the issue in favor of the validity of the E-VAT, the('.rrrt took note of two important things: First, the title of thel,l VAT Law (R.A. 7716)itself speaks of E-VAT's purpose which is to,'*prrnd the value-added tax system, and one way of doing this, the('.rrrt said "is to widen its base by withdrawing some of the,'rr,rnptions granted before," and second, in amending Sec. 103 oftlrt Tax Code, which specifies those transactions which areVA'l'-exempt, the amendment specifically speaks of P.D. 1590, ther''r'.y franchise of PAL, as one of those transactions that no Iongerr.ulr)fs tax exemption. Said provision reads:

"Sec. 103. Exempt Transactions - The following shall beexempt from the value-added tax:

xxx"(q) Transactions which are exempt under special laws,

except those granted under Presidential Decrees Nos. 66, 529,972,1497,1590. x x x"

The Court said: "x x x To insist that P.D. No. 1590 be mentionedrrr the title of the law, in addition to Section 103 of the NIRC, inn,lrich it is specifically referred to, would be to insist that the title of,, lrill should be a complete index of its content. x x x"

2. Power of the President to Veto ltems in an. Appropriation,litu€nue, or Tariff Bill - Sec. 27(2), Art. VI of the Constitution1,r'ovides that: "The President shall have the power to veto anyp:rrticular item or items in an appropriation, revenue, or tariff billlrut the veto shall not affect the item or items to which he does not,,lrject."

3. Necessity of an Appropriation Made Before Money May bel',ri.cl Out of the Treasury - Sec. 29(1), Art. VI of the Constitutionprovides: "No money shall be paid out of the Treasury except int) rr rsuance of an appropriation made by law."

4. The Prouision Against the Appropriation of Public Money orI'roperty for the Benefit of Any Church, Sect or System of Religion -

iir'c. 29(2), Art. VI of the Constitution provides: "No public money orlrroperty shall be appropriated, applied, paid or employed, directly

93

I,AW OI' BASTC'I'AXA'[']ON IN'fI I I.] PIIIT,IPPINI'S

or indirectly for the use, benefit, or support of any sect, church,denomination, sectarian institution, or system of religion or of anypriest, preacher, minister, or other religious teacher or dignitary assuch except when such priest, preacher, minister or dignitary isassigned to the armed forces or to any penal institution, orgovernlnent orphanage or leprosarium."

u5.' The Constitutional Prouision. on Taxes Leuied for a SlecialPurpose - Sec.29(3), Art. VI of the Constitution provides: "AIl moneycollected or any tax levied for a special purposes shall be treated asa special fund and paid out for such purpose only. Ifthe purpose forwhich a special fund was created has been fulfilled or abandoned,the balance, if any, shall be transferred to the general funds of theGovernment."

A good illustration of a special fund under this provision is theOiI Price Stabilization Fund, or OPSF, created under P.D. 1956 tostabilize the prices of imported crude oil. In a decided case, it washeld that where under an executive order of the President(8.O. 1024), this special fund is transferred from the general fundto a "trust liability account," the constitutional mandate is notviolated. The OPSF, according to the Court, remains as a specialfund subject to COA audit (Osrr-efi,a u. Orbos, etc., et al., G.R. No.99886, Mar. 31, 1993).

fr Allotmeruts to Local Gouernmeruls - Sec. 6, Art. X of theConstitution provides: "Local government units shall have a justshare, as determined by law, in the national taxes which shall beautornatically released to them."

CASES

CASANOVAS v. HORD,8 PHIL. 125

FACTS: Plaintiff herein was the grantee of a mining ciaim byvirtue of a Royal Decree from the Spanish Government, which wasissued in 1867. Under the terms of the aforesaid decree, no othertaxes except the taxes Ievied therein could be imposed on miningand metallurgical industries.

It so happened, however, that afterwards a law (Act 1189) waspromulgated which levied a tax on mining claims and an ad ualoremtax on mineral outputs. Flaintiff now claims that the law imposingsaid taxes is void for being an impairment of a contract. Incidentally,the taxes levied under Act 1189 were made to appiy to miningconcessions of the plaintiff herein.

94 95

LIMITA'IIONS ON'I'HE TAXING POWER

llliLD: There was an impairnnent of the contract existingI',,tw('on the plaintiff-concessionaire and the Spanish Government,,,rr1ir(lering that under said decree no taxes outside of those,r 'i I lrorized therein could be levied on mining concessions.

vll.l,trGAS v. HIU CHIONG TSAI PAO HO, ET AL., L-29646,N( )V. 10, 1g7g

I,'ACTS: Ordinanee No. 6537 was enacted by the City of Manilarrr l!)68 prohibiting aliens from being employed or to engage ort,ru t rcipate in any position or occupation or business enumeratedr lr, r'r,in whether permanent, bemporary or casual without first,,.' r1 pi11g an employment permit from the Mayor of Manila and payingilrr. perfirit fee of f50.00, except aliens employed in the foreignr,,r,,:;ions, members of religious cougregations, etc.

Itcspondent Hiu Chiong Tsai Pao Ho sought to have the ordinance,'rrr,rrlled on the following grounds: (f) that the ordinance violatesr1,,, rrrle of uniformity in taxation; (2) that the ordinance violatesr1,,. principle against the undue delegation of legislative power; and,r.lt i.[rat it violates the due process and equal protection clauses inr lr,, r lonstitution.

l{ELD: The City Mayor contended that the princip}e of'r,ri{iirmity of taxation does not apply to the case because the

, r ' li nance in question is not a revenue measure. The Court, however,

l. lrl that while the first part of the ordinance is regulatory in nature,r Irr, ,reco[d part requiring a fee of F50.00 is a revenue measure. There, , r,,; logic or justification in exacting f50.00 from aliens who havei,,',,:r cleared for employment. It is obvious that the purpose of the,,r'ilinance is to raise money under the guise of regulation.

'l'he amount of F50.00 is unreasonable not only because it is,.'iL:cssive but also because it fails to consider valid substantialI rllirrences in situations among individual aliens required to pay it.('lrr;rsification should be based on real or substantial differencesl,rrving a reasonable relation to the subject of the particular1,,Iislation. Here, the same amount of P50.00 is being collectedl'r' ,r11 every empioyed alien whether casual, permanent, part-time orlrrll-time, or iowly employee or highly paid executive.

fhe ordinance is void because it does not lay down any criterion,rr st,andard to guide the Mayor in the exercise of his discretion. Itv rotrates due process and the equal protection rule because requiring:r person before he can be employed to get a permit from the CityNlayor of Manila who may withhoid or refuse it at will is tantamount

r LAW OT'BASIC TAXATION IN THE PHILIPPINF]S

to denying the basic right of the people of the Philippines to engagein a means of livelihood. Aliens, once admitted in the Philippines,cannot be deprived of life without due process of law and thisguarantee includes the means of livelihood.

VERA, ETC., ET AL. v. CUEVAS, ETC., ET AL., L-8B69B-94,MAY 31, 1979

FACTS: This controversy arose from the order of BIRCommissioner Misael P. Vera requiring respondents, all engaged inthe manufacture, sale and distribution of filled miik products suchas "Darigold," "Liberty" and "Dutch Baby," to withdraw from themarket all of their filled milk products which do not bear theinscription required by Sec. 169 of the Tax Code within 1b days fromreceipt of the order, with the warning that failure to comply willresult in the institution of court action for violation of the order.Sec. 169, in substance, required that the containers of skimmed milkand all milk from which the fatty part has been removed shall carrythe words: "This milk is not suitable for nourishment for infantsless than one year of age," or such other equivalent words. Thevalidity of the Commissioner's order was contested.

HELD: Sec. 169 of the Tax Code has been repealed byimplication. Sec. 169 was enacted in 1g39 together with Sec. 141(which imposed a specific tax on skimmed milk) and Sec. 1?7 whichpenalized the sale of skimmed milk without payment of the specifictax and without the Iegend required by Sec. 1G9.

However, Sec. 141 was expressly repealed by Sec. 1 of R.A. 844,and Sec. 777 by Sec. 1 of R.A. 463. With the express repeal ofSecs. 141 and L77, Sec. 169 became a mere declaratory provisionwithout a tax purpose or penal sanction.

Filled milk is not similar to skimmed milk. The general clauseof Sec. 169 is restricted by the specific term "skimmed milk" underthe rule of ejusdem generis, Thus, the use of the term "skimmedmilk" in the head note and "condensed skimmed milk" in the textrestricts the scope of non-fat milk only to skimmed milk and,therefore, does not include "filled milk," a milk where the fatty partis removed and substituted with refined coconut oil or corn oil.

Sec. 169 is being enforced only against respondent, filled milkmanufacturers, and not against makers of condensed skimmed milktike SIMILAC, SMA, BREMIL, etc. which are similarly situated. Thisis a denial of the equal protection of the law.

9697

I,I MI1'A'IIONS ON'IHE TAXING POWER

l'ctitioner BIR Commissioner has no jurisdiction to enforce Sec.

I r;1) by virtue of Sec. 3 of the Tax Code which authorizes the BIR "to

;,rvr. effect to and administer the supervisory and police power, ,,rrli:rred to it by this Code or other laws." The enforcement of Sec.

It;1) sntails promotion of health and is not connected with any taxt,rr rl)ose. The BIR can exercise police power only when necessary inllr t,nforcement of its powers of collection of all national internalr (.v(.1ue taxes, fees and charges, and enforcement of all forfeitures,l,,.rrrrlties and fines connected therewith.

I,lnforcement, however, of Sec. 169 is the exclusive function oft Ir,' l,'ood and Drug Administration (now, Bureau of Food and Drugs)rr rrrler the law.

l'IIOVINCE OF ABRA v. HERNANDO, ETC., ET AL., L-49336,r\tlG. 31, 1981

FACTS: The Roman Catholic Bishop of Abra Province (RCBB)', lrr irning that the property of the catholic church therein is exempt,rrrtler the provisions of Sec. 1?, par. 3, Art. VII of the 1973t'opstitution, filed an action for declaratory relief in the Court ofl''rrst Instance of Abra, Branch I, of which respondent Hon. Haroldllcrnando is the presiding judge.

Without any hearing, however, the trial court adjudged saidproperty as tax-exempt under the aforecited provision. Hence, ther rrsLant petition for certiorari and mandamus by the Province of Abra,,,'lrresented by the Provincial Assessor, was filed seeking to reviewI lrr' lower court's decision.

HELD: To be exempt under the Constitution, Iands, buildingsrr rrcl improvements of religious and charitable institutions must not,,rrly be exclusively but also actually and directly used for religious,rrrd charitable purposes. This is the difference between the 1973( bnstitution and the 1935 Constitution, which requires only thattlre property be exclusively used for the purposes indicated. Hence,rl. was error for the trial court to declare said property exempt withoutIr rst conducting a hearing to determine the factual question of actualrr nd direct use of the property in question.

Moreover, there was a denial of due process to the Province ofAbra when respondent judge made a summary finding of the tax.xempt status of the aforementioned property' The lower court wasordered to hear the case on the merits.

fLAW OF tsASlC ]'AXA1'[ON tN'l,HtJ t,IUl,tpptNtrls

N.B.: The abovecited case involved an application of thcprovisions of sec. 17(3), Art. vIII of the 1g78 constitution. Thepertinent provision now is sec. 28(3), Art. vI of the 1982 constitution.Both of these provisions require that property, to be tax-exempt,should be "actually, directly and exclusively used" for religious,charitable and educational purposes.

CAGAYAN ELECTRIC POWER & LIGHT CO., INC. v.COMMISSIONER OF INTERNAL REVENUE, G.R. NO.60126,SEPT.25, 1985

FACTS: Petitioner Cagayan Electric Power and Light Co., Inc.(cEPALCo, for short) was granted an electric power franchise und.erR.4.3247 under which it was subject to S% tax on gross receipts ,,in

Iieu of all taxes and assessments of whatever authority uponprivileges, earnings, income, franchise, and poles, wires,transformers and insulators of the grantee, from which taxes andassessments the grantee is hereby expressly exempted."

On June 27, 1968, R.A. 5431 took effect making all corporationsliable to income tax except those exempt under Sec. 24(c)(1) andSec.27 (Sec. 26 ofthe Tax Code of tg77). However, on Aug. 4, 1969,petitioner's exemption was restored under R.A. 6020.

The question is whether or not petitioner is still exempt on itsincome between Jan. 1, 1969 (after the effectivity of R.A. 5481) andAug. 4 of said year when its tax exemption was restored. petitionerinvokes non-impairment of contracts.

HELD: The Iegislature can impair petitioner's franchise. Theconstitution provides that a franchise is subject to amendment,alteration or repeal by the congress when the public interest sorequires (Sec. 8, Art. XIV, 1935 Constitution; Sec. S, Art. XIV, lgTJCorustitutior,,'now, Sec. 11, Art. XII, lgSf Constitution). Also, Sec. 1

of petitioner's franchise (R.A. 3247) subjects the franchise to theConstitution and to Act 3636 (the Model Franchise Act) wheresec. 12 states that the franchise is subject to amendment, alterationor repeal. R.A. 5431, subjecting corporations to income tax, has ineffect withdrawn the exemption previously enjoyed by petitioner.

N.B.: The law governing franchises now is the UniformFranchise Law (8.O. 72, effectiue Dec. 19, 1gSG) which establishesuniform franchise tax rates of 2o/o fot electric power, water and citygas; SYo for telecommunications like telephone, telegraph, includingradio broadcasting (except T\); and bYo for all other franchises. Asidefrom this, franchise holders now pay income tax.

98 99

LIMI1'A'I'IONS ON'IHItr TAXING POWER

ll shcruld be noted that in the abovecited CEPALCO case, the| ',rrrt (lispensed with the delinquency surcharge as it appeared thattlr,. ( lrrrrmissioner himself was in doubt as to whether petitioner'slr rrrrt'lrise was taxable.

IiAI'ATIRAN NG MGA NAGLILINGKOD SA PAMAHALAANN(l I'ILIPINAS, INC., ET AL. v. COMMISSIONER OFlN'r't,)ttNAL REVENUE, G.R. NO. 81381, JUNE 30, 1988, andr .rrr1r&niotl cases

ITACTS: There are four petitions assailing the constitutionality,,1 tlr value-added tax OAT) law, or a tax levied on sellers of goods

,, rrrl scrvices with aggregate gross annual sales exceeding P200,000.\r,\'l' is computed at O% or 10% of the gross selling price of goods or

1, 1 ,,,,,r receipts from sale of services.

l'ctitioners contend that the VAT is not within the powers of theI'r,.riident to enact and that it is regressive, discriminatory,,,;rlrrcssivs and violates the due process and equal protection clauses,rrr,l ol,her provisions of the 1987 Constitution'

IIELD:t) Legislatiue authority of the Presidervt - It is should be noted

tlrrr{ Lhe under both the provisions of the "Freedom Constitution",,r,rl t,he 198? Constitution, the President is vested with legislativeI',,w()rs until a legislature under a new Constitution is convened.I trr, I'irst Congress created and elected under the 1987 Constitution\1

^:i convened on July 27,1987. Hence, the enactment of E-O.273rVA'l' [aw) on July 25, 1987, two days before Congress convened on.triy 27,1987, was within the President's constitutional power andir rr I lrority to Iegislate.

lt) Graue abuse of discretion - This contention is also without,,r,'r'it. Petitioners have failed to show that E.O' 273 was issued, ,,lrriciously and whimsically or in an arbitrary or despotic mannerl,r' passion or personal hostility. It appears that a comprehensive,t rrrly of the VAT was made before 8.O.273 was issued. In fact therrr,,r.its of the vAT had been extensively discussed by its framers,, rrrl other government agencies involved in its implementation evenrurrlcr the past administration.

c) VAT alteged as being oppressiue, discriminatory, uniust andi t't!ressiue - This assertion is not supported by facts and, rrr:umstances. Petitioners merely rely upon newspaper articlesn, lrich are actually hearsay and have no evidentiary value. To justify

tI,AW OI.' I}ASIC TAXAI'ION IN'I'IIIi PHILIPPINI.,]S

the nullification of a law, there must be a clearbreach of the Constitution, not a doubtful andimplication.

and unequivoculargumentativo

The sales tax adopted in E.o. 278 is applied similarry on all goodoand services sold to the public which are not tax-exempt at theconstant rate of O% and l0%.

d) Alleged discrimination - The vAT does not discriminateunduly against customs brokers with the imposition undersec. 103(r), NIRC of the tax on customs brokers *ho

""" excludedfrom the exemption of professionals under said provision.

The distinction of customs brokers from the professionals whoare subject to occupation tax under the then Local rax code is basedupon material differences in that the activities of customs brokers(Iike those of stock, real estate, and immigration brokers) partakemore of a business rather than a profession and are thus subject tothe percentage tax under sec. 174 of the NIRC prior to its amendmentby E'o. 273 which abolished the percentage tax and replaced it withthe vAT. If petitioner association did not protest the classificationof customs brokers, then the court sees no reason why it shouldprotest now.

REYES, ET AL. v. ALMANZOR, ET AL., G.B. NOS. 49889-46,APR.26, 1.991

FACTS: Petitioners are owners of parcels of land in Tondo andsta' cruz, Manila, which are leased and. occupied as dwelling sitesby tenants who pay monthly rentals not exceeding?800 in July rozt.On July 74, 1971, R.A. ObBg was passed. prohibiting for one yearfrom its effectivity increases in monthly rental on dwelling units orlands where the rentals do not exceed ?800 per month, buiallowinga 70o/o increase thereafter. The law also suspended Art. rroz of thecivil code, thus disailowing ejectment of lessees upon expiration ofthe period of lease. P.D. 20 later amended R.A. 668g by makingabsolute the prohibition to increase ngonthly rentars below?800 permonth.

In 1973, respondent city Assessors of Manila reclassified andreassessed the value of subject properties using the schedule ofmarket values reviewed by the secretary of Finance, therebyentailing an increase in the corresponding tax rates. petitionersfiled a Memorandum of Disagreement with the Board of raxAssessment Appeals averring that the reassessments were excessive,unwarranted, inequitable, confiscatory and unconstitutional since

100 1()1

I,IMI'I'ATIONS ON THE'I'AXING POWER

rlr,. tux irnposed greatly exceeded the annual income from thet,r"p,'r't,y- Likewise, it is argued that the income approach ratherllrrrrr (,he comparable sales approach should have been used in,1,.t,.r'rrr ining land values.

ll:rrd Board's decision finding the assessments valid was affirmed,r r I lr :rorre modification by the Central Board of Assessment Appealsr t 'ltr\A).

lll,)l,D: Petition is impressed with merit. The crux of the, , , r r I r.( )vcrsy is in the method used in tax assessment of the propertiesrrr,lrrt'stion,

llrrquestionably, both the comparable sales approach and the,.{ ,)rn(} approach are generally acceptable methods of appraisal forI rr r rr l,ion purposes. However, it is conceded that the propriety of one,, , r llrc cither depends on several factors and assessors, in fixingri,,. v;rlue of the property, must consider all circumstances and, l,.rrrcnts of value and musl exerci.se a prudent discretion in reaching, !rilr'luSiOnS.

'['he taxing power has the authority to make a reasonable and,,,, I r r riri. elassification for purposes of taxation but the Government's'i, I rrrust not be prompted by a spirit of hostility or, at the very least,,1, ,, r'irnination that finds no support in reason. It suffices then thatll',. lrrws operate equally and uniformly on all persons under siurilar1u( urrst.ances or thai all persons must be treated in the same,,r;rnner, the conditions not being different both in the privileges, ,,rrli'rred and the liabilities imposed.

Verily, taxes are the lifeblood of the Government and so should1,,. , ,rllected without unnecessary hindrance. However, such collection,lrrrrrtrd be made in accordance with law as any arbitrariness will.,'ft;rte the very reason for the Government itself. It is, therefore,rrr.r'ciisary to reconcile the apparently conflicting interests of the

'rri.lrorities and the taxpayers so that the real purpose of taxation,*'lrieh is the promotion of the common good, may be achieved.t',rnsequently, it stands to reason that petitioners who are burdenedlry f]1p Government by its Rental Freezing Laws (then R"A.6359,"rt{ P.tr}.20) under the principle of social justice should not now be

1,,,ualized by the same Government by the imposition of excessivel;rrics petitioners can ill afford and eventualiy result in the f,orfeiture,,1 I heir properties.

rLAW O}- BASIC TAXAI'ION IN'I'IIE PHILIPPIN!]S

GARCIA v. EXECUTIVE SECRETARY, ET AL., G.R.NO. 101273, JULY 3, 1992

HELD: Customs duties which are assessed at the prescribedtariff rates are very much like taxes which are frequentiy imposedfor both revenrle-raising and for regulatory purposes. Customs dutieswhich constitute taxes in the sense of exactions the proceeds of whichbecome public funds, have either or both the generation of revenuoand the regulation of economic or social activity as their movingpurposes.

E.O. 475 and E.O. 478 which it may be conceded to be substantiallymoved by the desire to generate additional public revenues, are not,for that reason alone, either constitutionally flawed, or legally infirmunder Sec. 401 of the Tariff and Customs Code. Petitioner has notsuccessfully overcome the presumptions of constitutionality andlegality to which those executive orders are entitled.

OSMENA v. ORBOS, ETC., ET AI-., G"R. NO. 99886, MAR. 31,1993

HELD: With regard to the alleged undue delegation of legislativepower, the Court finds that the provision conferring the authorityupon the ERB to impose additional amounts on petroleum productsprovides a sufficient standard by whieh the authority must beexercised. In addition to the general policy ofthe law to protect thelocal consumer by stabilizing and subsidizing domestic pump rates.Sec. 8(c) of P.D. 1956 expressly authorizes the ERB to imposeadditional amounts to augment the resources of the OPSF.

MACEDA v. MACARAIG, JR., ETC., ET AL., G.R. NO. 88291,JUNE 8, 1993 (RESOLUTION)

HELD: E.O. 93, as a delegating law, was complete in itself - itset forth the policy to be carried out and it fixed the standard towhich the delegate had to conform in the performance of hisfunctions, both qualities having been enunciated in Pelaez us. AuditorGeneral (L-23825, Dec. 24, 1965).

PATALINGHUG v. COURT OF APPEAX,S, ET dL., G.R.NO. 104786, JAN. 27, Lg94

HELD: The declaration of the area as a commercial" zone througha municipal ordinance is an exercise of police power to promote thegood order a.nd general welfare of the people in the locality. Corollary

i02 rCI3

LIMI'['A'I'IONS ON'fIIE TAXING POWER

t,lrereto, the State, in order to promote the general welfare, mayrnterfere with personal liberty, with property, and with businessrr nd occupations. Thus, persons may be subjected to certain kinds ofrostraints and burdens in order to secure the general welfare of theSt,ate and to this fundamental aim of the Government, the rights oftlrc individual may be subordinated. The ordinance which regulatest,he location of funeral homes has been adopted as part ofr,ornprehensive zoning plans for the orderly development of the area, overed thereunder.

COMMISSIONER OF INTERNAL REVENUE v. COURT OF't'Ax APPEALS, ET AL., G.R. NO. 106611, JULY 2l,l9g4

FACTS: Private respondent Citytrust Banking Corporation(Oitytrust) filed a claim for refund on Aug. 26, 1986 with the BIR inllre arnount of P19,971,745 representing the aileged aggregate oflhe excess of its total quarterly payments over actual income tax,ltre, ptrus carried-over withholding tax payments on governmentsccurities and rental income, as computed in its final income taxrt:turn for the calendar year ending Dec. 31, 1985'

In order to interrupt the running of the prescriptive period,( iitytrust filed on Aug. 28, 1986, a petition with the CTA for refundol'its income tax overpayments for the years 1983, 1984 and 1985Iotaling ?19,971,745. The Solicitor General, in its answer, arguedI,lrat a mere averment of net loss does not ipso facto merit a refund,that the amounts claimed were not propertry documented and thatI he entitlement to refund, if any, has already prescribed.

The case was decided solely on the basis of Citytrust's evidenceIrt,:cause no evidence was presented by respondent commission duetl,l the repeated failure of the Tax CreditlRefund Division to transmit{ he records of the case and investigation report to the Solicitor( leneral.

The CTA ordered the refund ofthe overpaid taxes for 1984 and1985, although only for the amounts properly documented, but notliir 1983 on the ground of prescription. The Solicitor General movedl"or reconsideration of said decision contending that Citytrust hadrrnpaid deficiency income taxes for 1984 and for ruhich assessmentrrotices had been issued. The CTA denied the motion and its decisionrvas affirmed by the Court of Appeals.

Petitioner elevated the case to the Supreme Court faultingrcspondent appellate court with the grant of the claim for refundrlespite failure of Citytrust to substantiate its claims and the BIR's

I,AW OI.' I]ASIC'I'AXA'I,ION IN'IHE PHILII'PIN!]S

findings of income and business tax liabilities which bar suchpayment.

HELD: The Supreme Court remanded the case to the CTA forfurther proceedings.

The BIR, represerted by petitioner commissioner of InternalRevenue, was denied its day in court by reason of the mistakesand/or negligence of its officiais and employees. Due to unavailabilityof records from the BIR, the solicitor General, in deference to thetax court, was constrained to submit the case fo, d;;ir; withoutpresenting any evidence.The aforestated impass6 came about due to the fact that, despitethe filing of the aforementioned initiatory petition in crA case No.4099 with the cTA, the Tax Refund Division of the BIR still continuedto act administratively on the craim for refund p""ui"urry nr"atherein, instead of forwarding the record.s of the case to the crA asordered.

It is a long and firmry settied rule of raw that the Government isnot bound by the errors committed by its agents. In the p"rfor*ur."of its governmentar functions, the dtate cannot be estopped by theneglect of its agents and officers. Although trre coreii'-ent maygenerally be estopped through the affirmative acts orprruii. officersacting within their authority, their negrect o" o*iriio, of publicduties-as exemplified in this case wil not and shourd not producethat effect' Nowhere is the aforestated rule more true than in thefield of taxation.

DRILON, ETC. v. LIM, ET AL., G.R. NO, ttZ4gT,AUG. 4, Ig94

^ FACTS: On appeal of four oil companies and a taxpayer, thesecretary ofJustice, pursuant to sec. 1gT ofthe Locar Governmentcode of 1991 (LGC), d.eclared ordinance No. T294, ";h;;;; knownas the Manila Revenue code, nur and void ro" rro**piiance withthe prescribed procedure for enactment of tax ord.inances and forcontaining certain provisions contrary to law

""d ;;l;pifi"v.RTC-Manila, on petition for certiorari filed by the city of Manila,revoked the secretary's resolution and sustained th""o"diru".u,holding, inter olia, that the procedurar requirements had beenobserved and declaring that dec. 1g7, LGC was unconstitutionarbecause it' vested the secretary of Justice with the power of controlover local governments in vioratio, of the policy or-rr.Ju"tonomymandated by the constitution and the provisions therein vesting

104 105

LII\4ITATIONS ON THE TAXII\IG POWER

r,rrly t.hc power of supervision over local governments to thel'r r,r-ridr:nt.

llliLD: Sec. 187, LGC does not violate Secs. 4 and 5, Art. X oftlr,, ()onstitution and the policy of local autonomy.

on the issue of noncompliance with the prescribed procedure intlr. cnactment of the Manila Revenue Code, the Court ruled thattlrr' lrrocedural requirements have been duly observed: notices wererr.nl. to the interested parties and the minutes of the hearings showedtlrrrt, the proposed and approved ordinances were published in theri'wspapers. The only exception is the posting of the ordinances as,r;rproved, but this omission does not affect its validity since itsl,rrblication in three newspapers of general circulation wiII satisfy,lrrc process.

'I'OLENTINO v. SECRETA.RY OF FINANCE, ET AL., G.R" NO.I 16455, AUG. 25, lgg4, and companion cases

FACTS: Various suits for prohibition and certiorari were filed,'lrnllenging the constitutionality of R.A. 7716, ar the ExpandedValue-Added Tax Law (E-VAT).

HELD: The value-added tax (VAT) is levied on the sale, barter()r exchange of goods and properties as weII as on the sale or exchange,rl'services. It is equivalent to 10% ofthe gross selling price or grossvalue in money of goods and properties sold, bartered or exchangedor the gross receipts from the sale or exchange of services. R.A.'/716 seeks to widen the tax base of the existing VAT system anclonhance its administration by amending the NIRC.

In a 10-5 vote, the Supreme Court upheld the vaiidity of R,.A.'7716 on the following grounds:

(1) The procedural requirements of the Constitution have beencomplied with by Congress in the enactment of the statute.

(2) Judicial inquiry on whether the formal requirements for theenactment of statutes, beyond those prescribed by the Constitution,have been observed is precluded by the principle of separation ofpowers.

(3) The law does not abridge freedom ofspeech, expression or ofthe press, nor interfere with the free exercise of religion, nor denyto any of the parties lhe right to an education.

(4) In view of the ahrsence of factual foundation of record. clairnsthat the iaw is regressive, oppressive and confirscatory and that, it

t,AW Ol,. I}ASl.,t,AXA,l,loN l N,t,ll t,i l,, l l,lt,l)lNl,lti.

violates vested rights protected u,der the contract clausc ar.prematurely raised and do not justify the grant "io"""o*rive reri.r,by writ of prohibition.

TAN v' DEL Ros-ARIo, JR", BT AL., G.R. No. 109289, andCARAG, CABALLES, JAMORA AND SOMERA iEW"ON'N'TCNS,ET AL. v. DEL RosARro, JR., nic., ET AL.;G;.'N6. rog+ao,jointly decided on OCT. A, tgg4FACTS: petitioners crairn to be taxpayers adversery affected bythe implementation of R.A. 74g6, commonly known as simprifie,Net Income Taxation Scherne (,iSNITS,,).

- I" C.R.io. r0gZAs,pertitioners chalrenge the co,stitutionarity of n-a.-iago; Jrra i, c.n.No' 109446, the varidity of serc. 6 of Rev. Reg. No. 2-98 promurgatedpursuant to said amenclatr:ry law is assailed.

HELD: The court rejecteri the contention of petitioner in G.R.

ili_l?"]]:lthat the title of Fr. No. B4st4,which nu"urnu n.a . v4s6,

The full title reads: "{n Act Adopting the simprified Net IncomeTaxat'ion scheme for the serf-n*proyua und professionul, er.gug"ain the Practice of rheir Frofession, imending sections 21 and 2g ofthe National Internar Revenue code, As Amlnded." i;;. worded,the title of the b,r sufficientlv meeis the objecti,r"* or iu.. 26{1),Art. VI of the ConstiLution.T'he amendatory law cannot be considered as having adopted agross i,come, instead of having retained the net i".rn,-'"]r"xationscheme. Limiting alrowabre deJuctions from gross income is neitherdiscordant with, nor opposed to, the net incole ,". .r"""pt.That R.A, 7496 imposes tax on single proprietorships andprofessionals differentry from the manner it imposes tax oncorporations and partnerships cannot be said to violate theconstitutional requirement that taxation sha,l be uniform andequitable. Neither is R.A. 74g6 violatrve of due process. The dueprocess clause may correctly be invoked. only whei-r tf."."'i" a clearcontravention of inherent or constitutional rimitations irJrr"

"*u".rr"of the tax power.

on petitioners' contention in G.R. No. 10g446 that pubricrespondents exceeded their rule-making authority i*"pplyi;; SNITSto general professional partnerships [y promulgating sec. 6, Rev.Reg' No. 2-98, the court held that *rio s".. o aid not arierbut merelyconfirmed sec. 28 of the Tax code as amended by R.A. 7496 on the

106 107

I,tM I'I'A'I'IONS ON'I'HE TAXING POWER

r rlr.r)t. ol'tlcrlr-rctions applicable to all individual income taxpayers,, r r ( lrt'i r non-compensation income. There is no evident intention intlr,, l:rw, oithcr before or after the amendatory legislation to place on

,rn unequal footing or in significant variance the income taxt r r.:r t,rnent of professionals who practice their respective professions,ir,lividually and of those who do it through a general professional

1,;r rt,nership.

MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS,lNCl. v. DEPARTMENT OF FINANCE SECRETARY' G.R. NO.t08524, NOV. 10, 1994

HELD: The Court did not find merit in petitioner's argumenttlurt, RMC No. 47-91 granting exemption to coconut farmers and copra

l,roducers but not to traders and dealers is discriminatory andv rolative of the equal protection clause of the Constitution. There isrrr;rterial or substantial difference between coconut farmers and copra

l,roducers, on the one hand, and copra traders and dealers, on the,rllrer. The former produce and sell copra' the latter merely sell,.opra. The Constitution does not forbid differential treatment oft)('rsons so long as there'is a reasonable basis for classifying them,lilTerently.

COLLECTOR OF INTERNAL REVENUE v. COURT OF TAXAI'PEAL, ET AL., G.R. NO. L24043, OCT. 14, 1998

FACTS: Private respondent Young Men's Christian Association,,Ithe Philippines, Inc. (YMCA) is a non-stock, non-profit institutionwhich conducts various programs and activities that are beneficialt,o the public, especialiy the young people, pursuant to its religious,cducational and charitable objectives.

In 1980, private resporldent earned, among others, an income ofl*676,829.80 from leasing out a portion of its premises to small shop

owners, like restaurants and canteen operators, and?44,259 fromparking fees collected from non-members' On July 2, 1984, thecommissioner of Internal Revenue issued an assessment to privaterespondent, in the total amount of ?415,615.01, including surchargeand interest, for deficiency income tax, deficiency expandedwithholding taxes on rentals and professional fees and deficiencywithholding tax on wages. Private respondent formally protestedthe assessment and, as a supplernent to its basic protest, fiIed a letterdated Oct. 8, 1985. In reply, the Commissioner denied the claims ofYMCA"

t,Aw ot,, BASt0,t.AxA't,toN tN,t,illd I,iltLII'l'lNt,ls

with the denjal.of its formal protest by the collector of lnternalRevenue, YMCA liled a p"iitil" ,r "urriu* ;;f;;; ;" CTA onMar. 14, 1e8e. The CTA rutiJi" r""""

"r :M.,CA;;;;_rri", holdingthat the reasing of private ""rpo"a*t's facilities;;J;;; operationof a parking rot are. reasonabrv incidentar to and ;;;;;;ry for theaccomplishment of its objectivls. The tax court thus dismissed the1980 deficiency fixed, contracto"jrlrra irr.o,ne taxes, but sustainedthe deficiencv expanded ,"ithh;l;i* ,"r and withhording taxes onwages for the same year. l

The commissioner erevated the case to the court of Appealswhich initia,v decidSd in its favor i"y reinstating the assessment ofdeficiency fixed' contractor's and irr".omu taxes. However, findingmerit in yMCA,s -motion fo"

"u"orrrideration, the appellate courtreversed itserf and prornulgated the iirst assessed "u"orutio., datedsept' 28, 19g5 grantirrg.uiJ-oii"i

"iylaca bv affirming the crA,sdecision in toto. on febrzg, ige6,-;; c;;;;;iffi*:i"nied theCommissioner,s motio" fo" i".on*ii"r"rir".HELD: The petition is meritorious"It is a basic rure in taxation that the factuar findings of the crA,when supported by substantiar

""ia"".", wilr not be disturbed onappeai unless it is-s-hown that said court committed gross error inthe appreciation of,facts. In trr" pl".""t case, the Court found thatthe Feb' 16, 1994 decision ,f ;hJa;;t of Appeals did not deviatefrom this rute. The,tatter ;;;;;;;lied the law ro the facts asfound bv the crA andruled on th""i.;;; raised by the commissionerof Internal Revenue. That it dii ;;;; manner different from thatof the crA did not necessar,y imply a reversar of factuar findingsnor was it irregular or abnormat.on the crucial issue of whether the rentar income of yMCA onits real estate is subject to tax, ii" irr.t rured that the exemptionclaimed bv yMCA is expressrv Ji""riJ*"a bv rhe verv wording ofthe iast paragraph of the; s".-;i-trr*; rr"*, ^dr". ii,' iiir wmclwhich rnandates that the income or

"r**ot organizations (such asthe YMCA) from anv of their p;;ili;, rear or-personar, be subjectto the tax imposed by the .rr* C"au. il""r,ruu the ]ast paragraph ofsaid section unequivoca,v uubjects't"i* the rent incoml of theYMCA from its'eal nroperty, the court is duty-bound to abide strictrvby its iiteral rneaning anei to refrain i""* ,u.orting to any convoruteiattempt at construction.A reading i:f tire last paragraph of Sec. 2? (now, Sec. *,)ineludiblyshow-s that the incoine f"o*"u"i pr"r*, of exernpt organizatians,

108109

LIMITATIONS ON THE TAXING POWER

,r, w,,ll trs that arising from any activity it conducts for profit, isr r, r r r I r lt'. 1'he phrase "any of their activities conducted for profit" doesr',rt rlualif/ the word "properties." This makes income from the1,r,,pr,rt,y of the organization taxable, regardless of how that incomer'i ,r(,(l - whether for profit or for lofty non-profit purposes.

l't'rba legis non est recedendum. The law does not make a,lr:ilrrrct,ion. The rental i.ncome is taxable regardless of whence suchnr( ornr) is derived and how it is used or disposed of. Where the lawrl,r.r; not distinguish, neither should the Court.

'l'he exemption granted by Sec. 28(3), Art. VI of the 1987t',,rrst,itution to charitable institutions pertains only to propertyIrr rcs, not to income tax. "(W)hat is exempted is not the institutionrl,ir.lf x x x; those exempted from real estate taxes are lands,l,rr rltlings, and improvements actuaIIy, directly and exciusively usedl,,r' religious, charitable and educational purposes" (Record of thet',,rrstitutional Commission, VoI. 2, p. 90).

Neither can YMCA invoke Sec. 4(3), Art. XIV of the fundamental, lrrrrLer to claim exemption from income tax. Private respondent is.xr'rrpt from payment of property tax, but not from income tax onr,'rrtals from its property. To be granted the exemption under the,rlirrecited provision, YMCA must prove with substantial evidenceI lrrrt, (1) it falls under the classification of non-stock, non-profit,'rlucational institutions; and, (2) the income it seeks to be exemptedlr.om taxation is used actually, directly and exclusively for,'tlucational purposes. However, the Court notes that not a scintilla,,1'evidence was submitted by private respondent to prove that itrnct said requisites. The bare allegation that it is a non-stock,,,on-profit educational institution is insufficient to justify the(.xemption from payment of income tax.

The Court ruled that YMCA is not an educational institutionwithin the purview of Sec. 4(3), Art. XIV of the Constitution. Undert he Education Act of 1982, such term refers to schools. The schoolsystem is synonymous with formal education which "refers to thehierarchically structured and chronologically graded Iearningorganized and provided by the formal school system and for whichcertification is required in order for the learner to progress throught,he grades or move to the higher levels."

Furthermore, under the Education Act of 1982, even non-formaleducation is understood to be school-based and "private auspicessuch as foundations and civic-spirited organizations" are ruled out.trt is settled that the term "educational institution," when used inIaws granting tax exemptions, refers to a school, seminary, college

IAW OI I}ASIC TAXATION IN'I'IIF] I'HII,IPPINES

or educational establishment. Therefore, private respondentcannot be deemed one of the educational institutions covered bythe constitutional provision under consideration.

EXERCISES

1. San Antonio Colleges Foundation, Inc. (SACFI) is a non-stock,non-profit educational institution. SACFI owns a 5-hectare lotone-half of which is used as SACFI's school campus, while the otherone-half is vacant. To cope with the increasing operating costs andto upgrade its facilities, SACFI plans to do the following, effectiveJan. 1, 1991: (1) rent out to Supermarkets, Inc. the vacant portionof the lot for Pl.0 Miliion a year; (2) increase tuition fee by 6% inaccordance with government regulations; and (3) import 30computers for use in its computer courses.

(a) Is SACFI subject to real estate tax on its 5-hectare lot forcalendar years 1990 and 1991? Explain. (b) WiIl SACFI be subjectto income tax on its renlal income from Supermarkets, Inc.? Explain.(c) If the increase in tuition fee results in a net income from schooloperation in 1991, will SACFI be subject to income taxes and dutieson the importation of the 30 computers? Explain. (1990 Bar)

2. State at least three constitutional limitations on the power totax. (1970 Bar)

3. State at least three inherent limitations on the power to tax.(1970 Bar)

4. X, a private individual, leased his piece of land to a schoolwhich is being operated for profit. A building was constructed bythe school on the leased property to be used as its library. Is theland subject to the real property tax? Can the school claim exemptionfrom the payment of the permit fees for the construction of thebuilding? State your reasons. (1969 Bar)

5. A law was passed condoning unpaid real property taxes. WiIlthis law benefit the taxpayers who have been prompt in paying theirtaxes? Explain. (1968 Bar)

6. The municipal council of Taal, Batangas passed an ordinancewhich reads: "An Ordinance Imposing Upon Asis Candy Companyor Any Other Person or Entity Operating a Candy Factory Withinthe Municipality An Annual Tax of f1,000.00." At the time theordinance was approved, Asis Candy Company was the only candyfactory operating in Taal. Is the ordinance valid? (1968 Bar)

110 111

I,IMI'I'A'I'IONS ON TI-IE TAXING POWER

'/ ljt,ate at least three provisions of our Constitution which have,r rlrrctrL or indirect bearing on taxation. (1965 Bar)

tl What is meant by situs of taxation? What determines situs oft ,r r;r l iun? (1973 Bar)

t) 'fhe City of Manila passed an ordinance imposing a fee on the1,r r, ,' of admission tickets to cinematographs, theaters, theatrical,l,,,ws and boxing exhibitions. Said ordinance, however, did not tax\', r'r()us other kinds of amusement such as race tracks, concert halls,, n.uses, and other places ofamusements. A corporation engaged intlr,' rrrotion pictures business attacked the validity of the ordinance,,rr llre ground that it is violative of the principle of uniformity ofr;rxrrl,ion enjoined by the Constitution. Decide and briefly explaintlr,, s'lyasens for your decision. (1973 Bar)

10. Pursuant to the Land Reform Program, it was provided bylirr,v t,lrat land bonds issued by the Land Bank in payment for lands{ x t)r'opriated by the Government may be used by the former landlordsti, l)iry for their taxes. Subsequently, the privilege was modified by,'llowing instead a bondholder to borrow money from thel)i.v()lopment Bank of the Philippines (DBP) by assigning the bond,,,, ir discounted basis to the latter. Does this constittrte an'rrrlrrirment of the obligation of contracts? (1974 Bar)

I l. Explain briefly the limitation of international comity on the1rr rw0r of taxation. (1989 Bar)

r2. Sec. 28O)(8)(A) (now, Sec. 32tBlt7ltzl) of the Tax Code exemptsIr ,ru tax the interest on foreign loans extended to Philippine debtorsl,y I'oreign financing institutions owned, controlled or enjoyingr ,,l inancing by foreign governments like the Export-Import Bank of,l:rgran. Private foreign financing institutions, however, outside the,rl,rrr:mentioned class do not enjoy the same tax exemption privilege.l:r il not violative of the rule on equal protection, uniformity and,'rltrality of taxation? State your reasons.

13. Assume that there is a bill pending in Congress, whichpr'oposes to levy the VAT on apartment lessors. Assume that youiu.(, one of those who are opposed to the passage of the legislativerrrt.itsur€. What possible objection can you put up in light of the rule,rl'progressivity of taxation, which is embodied in Sec. 28(1), Art. VI,,1' t,he Constitution? Explain fully.

14. Discuss the rule of situs of taxation as to -(a) the imposition of the estate tax on the property left behind

lr.y a non-resident alien decedent abroad.

I LAW Ol,' BASIC'|'AXATION tN,il-ilt t,l-llt,tpptNlls.

(b) the assessment of incorne tax on the salary earned by uresident citizen in the United States; and

(c) the applicabiiity or inapplicability of the principle of ,,mobiliusequuntur personanL."

15. New Horizons Electric company is a grantee of a franchisoto construct, maintain and operate an electric iight prant in thoProvince of Nueva viscaya for a period of twenty-five years. underthe terms of the franchise, the company shall pay a franchise taxof 2% annually on its gross receipts which shall be "in lieu of alltaxes of whatever kind and nature that may be imposed by anynational or local government" for the duration of its franchise. onDec. 19, 1986, however, E.O. Z2 was promulgated establishinguniform franchise tax rates on all existing franchise guarantees. TheBIR assessed the company for income tax on income earned. afterthe executive order went into effect. Is this not an impairment ofthe obligation of contracts? Explain your answer.

112 o2roT

Chapter III

I X ) UBLE TAXATION AND TAX EXEMPTIONS

ll()UBLE TAXATION DEFINED. Doubie taxation is defined,,1-ll',,*,,rg the same propelty twice when it should be taxed but once.lt lrir:r rrlso been defined Sjtaxing the same person twice by the same;rri r:rrlrt:Lion over the same thing (Victorias Milling Co. u. Municipality,,1 l'tctorias, Negros Occidental, L-21183, Sept. 27, 1968). U.S.f ,n r,,prudence describes it a$frpxing the same person twice by the,,rr,r,, jrrrisdiction for the samdlhing or purpose (Haruey Coal & Coker',, rt. I)illon, 59 W. Va. 605; 53 S.E. 928, 6 L.R.A. [NS] 628).

N0 PROHIBITION AGAINST DOUBLE TAXATION.\,,,,r'rling to the Supreme Court in the case of Villanueua u. Citv oftt,,tht (L-26521, Dec. 28, 1968), there is pdconstitutional prohibitionrrlirrrnst double taxation in the Philippines. trt is something notl,rv,red, but is nevertheless permissible. Double taxation is nott,,r lritlden by our fundamental law (Pepsi-Cola Bottling Ca. of thet'ltrli.ppines, h,c, u. City of Butu,arl, et al., L-22814, Aug. 28, 1968).

tt is interesting to note that the Philippines has not adopted the,,,yrrrrction against double taxation found in the Constitution of theI I r r rLed States and in some states of the American Union (Serafica u.

l'tt'nsllrey of Ormoc City, et al., L-24813, Apr. 28, 1969). There is,tlrlrefore, definitely no prohibition against double or rnultiplet;rxrrtion in our jurisdiction (Comrnissioner af Internal Reuenue u"

Ilrrtoaiian-Philippine Co., L-16315, May 30, 1964).

KINDS OF DOUBLE TAXATION. Double taxation is,rornetimes known as "darplieate" tq4_aliqrr,, Duplicate taxation mayllr,t1irectorindirect.ffidqbordoubIetaxationintlro objectionable or prohibited sense (also known as obnoxious)r!rcans that the same property is taxed twice when it shoutd lre taxed,rrrly once; and that both taxes are imposed on the same property or:rrrl:ject matter for the same purpose, by the same State, Government,,rr taxing authority within the same jurisdiction or taxing districttlrrring the same taxing period and covering the same kind orr:lraracter of tax (Yi,llanueua u. City o{ Ilaila, supra).

Consequently, it has heen hetd that l.h.ere. is no objectionable,louble taxation if a reaJggate tax as,vfel as a'tenemegLlg$ areimposed on the sarne property because the two impositions are not

r[,AW OIT I]ASIC TAXATION IN THE PHILIPPINES

of the same kind or character (Ibid..).

\rmdircglguplicate taxalion, which is the opposite of direct doubleta x a t i o n, is n o-fregTlff o b j e ct i o n ab I e. Th e fo llow i n g c a se s il I u st ra tethe point that in the absence of the elements oflirect duplicatotaxation, double impositions levied on a particular subject of taxationmay be justified.

- 1. The taxpayer's warehousing business, although carried on inrelation to the operation ofits sugar central, is a distirict and separatetaxable business. There can be no double taxation where the statemerely imposes a tax on every separate and distinct business in whicha person is engaged. Moreover, there is no prohibition against doubleor multiple taxation in this jurisdiction (commissionir of InternalReuenue u. Ho,waiian-Philippine Co., supra)

2" A license tax may be levied upon a business or occupationalthough the land or property used in connection therewith is subjectto property tax. The state may colect an gdlqg!9t\.won propertyused in a calling and at the sarne time irfpo;;lG;; tax on thatc_alling, the imposition of the latter kind of tax being in no sense adouble tax (Villanueua t). City of llailo, supra),

Thus, there is no objectionable double (or multiple) taxation iftenements in a city are subject to real estate tax while the businessof leasing said property are arso subject to real estate d.earer's taxunder the National Internal Revenue code as well as the tenementtax levied by the city. There is nothing inherently obnoxious in theexaction of license fees or taxes with respect to the same occupation,calling or activity by both the state and apolitical subdivision thereof(Villanueua u. City of lloilo, supra; cf. Sec. I0g, lgg| NIRC).

3. Both a tricense fee and a tax may be imposed on the samebusiness or occupation for selling the same articie and this is not inviolation of the rules against double taxation (compafi,ia General deTabacos de Filipinas u. City af Manila, L-l6dtg, iune Zg, 1g6J).

4. where a local tax is levied on the sale or disposar of everybottle or container of liquor or intoxicating beverages and at thesame time the business of selling such product is also sub;ect to liquorIicense annually of P600, there is no doubre taxation since the liquorlicense constitutes a regulatory measure which is imposed in theexercise of the statet police power (san Miguel Brewery, Inc. u. cityof cebu, L-2N12;-F ;b. zo, tir\._ 5" A tax imposed both on the occupation of fishing and on thefishpond itself does not constitute doubre taxation. The subjects oftaxabion are different from each r ther (people u. fuIend"aros,97 Phil. 958 [Unrep.J).

114

l)( )l.l Ill,l,)'l'AXA't'lON AND'l'AX EXEMPTIONS

ti 'l'lrrrro is no double taxation if a local ordinance imposes a tax,,rr I lr. sl,orage of copra where it appears that the finished productsr,r:rrrrrlrt:l,ured out of the copra are subject to sales tax (now, VAT)rrr,l,.r l,lrc Tax Code (Procter & Gamble Philippine Man'ufacturingt ,tt t, (). Municipality of Jagna, Prouince of Bohol, L-24265, Dec. 28,l,t,'l))

'/ 'l'here is no double taxation involved in a case where a tax oft",, rs imposed under Sec. 249 of the Tax Code for bank reserve,lr.lrr:ioncy while a penalty of 1/10 of 1% a day is also imposed as a

1,,.rrrr lt,y as a consequence of such reserve deficiency under the CentralIr;rrrk Act (R.A.265) (Republic Bank u. CTA, et al., G.R./V,,: 62554-55, Sept. 2, 1992).

g Double taxation means taxing the same property twice whenrr :,lrould be taxed only once. That is, taxing the same person twicel,y llrc same jurisdiction for the same thing. In Afisco Insurancer',,rttorcttiorl, et al. u. Court of Appeals, et al. (G.R. No' 112675,.l rr r r 25, 1999), the pool of machinery insurers was held to be a taxable,.rrt rl,.y distinct from the individual corporate entities of the ceding,,,rr,pi,rnies. The tax-on its income is different from the ta{-Qbe,l,r'rrlcnds received-by said comp-6nies, and clearly, no double taxationr', i rrv olv€d"

MEANS EMPLOYED TO AVOID DOUBLE TAXATION. It, , ,'rlgnificant to note that our tax system provides for certain schemesirr .rder to avoid or minimize the harsh or burdensome effects of,l,,rrble taxation. These tax reliefs or schemes are sometimes,.rrrlrodied in tg$ trqaties or agrqpnge4]ls with foreign countries while, r I I r t ,r's are imbedded in statutory proviiions found uider our existinglrrrvli.

lfor example, under Sec. 25(b)(5)(B) of the Tax Code (Cf.::,','. 28[B][5][b], 1997 NIRC), the burden of double taxation on the',,rrrre dividend income earned in the Fhilippines by a no:r'residentl.r'1,lgn corporation (one tax in the Philippines and another tax intlr(. do-dfrilIary country) is reduced by the imposition of the lower,,,lc of 75% (rn iieu of the 35%) subject "to the condition that the, ,,urrtry in which the non-resident foreign corporation is domiciled

'lrrrll allow a credit against the tax due from the non-resident foreign,,,'' pr-rra[iffiTEf es-deerrEl-i6-EETe bben p aid in the Ph ili ppi nes,,,1rrivalent h 2A% which represents the difference between ther,'tlrrlar tax (35%) on corporations and the tax (15o/o) on dividendsr x x" (see also Commissianer of Internal Reuenue u. Procter &ritttnhle Philippine Manufacturing Corp., et al., G".8" No. 66838,!tt't 2, 1991).

r I,AW OF I]ASIC I'AXATION IN TIIE PHILIPPINES

Most common of these tax reriefs are tax deductions and taxg_ry:lits. To illustrate: In the case of deductidis,-6; ;;;;;i;; ;;;estate tax law (Sec. 79;now,,Sec. S6[A]IZJ, tggT NIRC)p"oula"" fo,the so-called "vanishing deductiin''i in order t" -iiir"I""ilr. i

b-urdensome gffects of double taxation on the "u-" propiiy tfrrt ithe subject of two or more transfers pertaining io two l" _o"

As to the tax credit set'up, our present law contains a number oftax relief schemes also. For example, for value_added tax (VAT)purposes' the tax on inputs or items that go into the manufacture offinished products (which are eventually sord) may be credited againstor deducted from the output tax or tax on the finished proJuct.In income taxation, too, the credit scheme is present. Forinstance, in the case of a resident citizen or domestic corporation

whose income from sources within a foreign country is arso taxableunder Philippine law, the tax paid to such fJreign.o""try*ry, undercertain limitations, be claimed as a credit agaiist thu phili;eine taxon the same income (See. SaICJ[S][oJ, tggf NIRC)

How is the cred.it for foreign toxes paid ctrriued o1? Assumingthe income from a foreign ,orr"* is derived from only one country,the Tax code provides that, "(a) The amount of the .rldit in respectto the tax paid or incurred to any country shall not exceecl the samepropgrtiqn of the tax against which such creditlE-I6r6i, which thetaxpayer's taxable income from sources within such country underthis Title bears to his entire taxabre income ro. trr* .u*e ia*auteyear; and, (b) The total amount of the credit shari not exceed thesarne proportion of the tax against which such credit is taken, whichthe taxpayer's taxable income from sources without the Fhirippinestaxable under this Titre bears to his entire taxable i*coine fbr thesarne taxable year" (Sec 34 tcltAlful and. [b], tggf NIRC).

Thus, supposing the taxable income of X Corp., a domesticcorporation, from fo'eign country frI is F2,000,000 anel its philippinesourced income is F8,000,000. The foreign incorne tax actually paidis P800,000. The foreign tax credit is coLputed as follows:

_- step 1: To get the maximum allowable foreign tax credit underPhilippine law:

decedents.

Taxable Incorne(Foreign Source)

Total Taxable Income(Foreign and Philippine

Sources)

Philippine Taxon the

Total Incorne

{,iriiit of$'oleign

T"'ax ilr"eelit

t16 t\7

DOUI]I,f] TAXATION AND TAX EXEMPTIONS

( )r,

-I too,ooot'ro,oi6loiC x

l"T -2' To credit foreign tax against FhiLippine tax, deduct the" " 1 1'

u: the foreign tax credit (per formula) from the Philippine taxttt llrt) toreign tax actually paid, whichever is lesser.

?3,500,000(at 35o/o) u fl00,000

F3,500,000

700,000

P2,800,000

l'ess: Fq.slgn tax Credit Allowable

..I.1"-t".uign tax credit method, as a means of *iryr-igg1lggLl"I Ir xrr Lroll' applies also to resident aliens provided thaffie reciprocityr''(luueme\t in the law is satisfied and subject to the allocation rule,',,i'

jtabhslred in the Tax Code (see Sec.SaIC][3/ and par. [a][A] &

/,/'/,tnereofi see also Commissioner of Internal Reuenue u. V.E.t "ttttcRy, et ql., L-tsl69, L-18262 andL-21434, July 13, 1964).

In thu "u"",

however, of non-resident Filipinos, since their']':::'c'-:9\,rced income is subject to two taxes levied under two' lt ll erent j,rri.di.tions, the tax

"uli"f .o-", in the form of a deduction

"' '!: tbrelgr national income tax from:the foreisn soursed income

'l:""'-,The- tu* credit scheme in this instancJ is(tlol!-Available1,\,'c. 21 [b], I gfT NIRC).

Il.:ho.,ta be noted that under Sec. 23 of the 1997 Tax Code

lllul'dtts for the general principles of income taxation in thet'rttupprri€s,

a non-resident citizen is taxable only on income derivedrr L'm.sources within the Philippines. An alien indidividual, whether;t reslo€rlt of, not of the Philippines, is taxable only on income derivedr|om sources within the Philippines. A foreign corporation, whethert'n$a$€d or not in trade or business in the Philippines, is taxable')niy on rncome derived from sources within the Philippines.

r,h9 bun"rit of credit against income tax for taxes of foreignr"(runrnes shall be allowed to a citizen of the Philippines and a(rornestlc corporation if the taxpayer so signifies in his return; but:;ucn oenefit shall not be allowed to an alien individual and a foreignt:orporatioq

Sec. Sa[cJt3]tal and. [b], 1gg7 NIRC).

r l,AW olf Bn sl( t ,l,AXA'l'loN lN ,l,il l,l I,lil l,ll,l,lNl,tS

Among the examples of tax t,r:caties ftrr ro.[ierf'r'rorrr or rrvoirrlrrrr,oof double taxation are the RP_US Tax Treaty ancl tho ll.I]:Wur'rt,Germany Tax Treaty which *frit-nc-sutject of compu.utirrr r()vr(,win C3mylssioner of Internal Reuenue u. S. C. Johnsoi ,ni ion, t,,r.,et al. (G.R. No. 12710b, June 2b, 1999).

TAX EXEMPTIONS. An exemption frorn taxation may bo ,defined as a grant of imgrynity, exDress or imglied, to particular i

Sillilii" corporations from the obligation to pay taxes (51 Arnt, I

KINDS oF TAx ExEMprIoNS. Immunities from taxationwhich originate from the constitution are know n as constitutionarexemptions; those which emanate from legisl "tio" "J€.id.*,oiiexemptions. Whenever exemptions u""

"*p""r"ly granted by organicor statute law, they are called expL?:!-_g_Lemptions. 'I;pn;;exemptions, however,-exist whenever [Efiicuiai pe"sors-, propertiesor excises are deemed exempt as they fa, outsiie il;;;" of thetaxing provision itself. For example, if a tax is r""i"J* t"nementhouses in a particurar rocality but such law is silent as to thotaxabilitv of other-types of dweiling which u"" "*lrlins i., tlu,tlocality, it is implied that the ratter aie exempt from said t;,..'ffiexemption connotes absolwe immunity; whiL pqrtial exemption isone where coltection of a pilt of the ,t:1!]9B6nffi1lrln.'

PRINCIPLES GOVERNING TAX EXEMPTION1' Exemptions from taxation are highly disfavored in law, andhe who claims an exemption must be abL to i-r,*iry hrs claim by theclearest grant of organic or statute law. a"

",.l"rrilori f"r* trrucommon burden cannot be permitted to exist rpo., uugi," i*pir.rtio.r.(Asiatic Petroreum co. [p.1.], Ltd. u. Lranes, 49 phil. 466 cited inCollector of Internal Reuenue u. Munila Jockey Ctub, Inc,-, gg phil.670; Dauao Light & power co., Inc. u. comiissiiil,

"r'c"ston.S,et al', L-28739 & L-28902., Mar. 29, 1gr2). To epitomize thf principre,it is well settled that ,.taxation is the . -+"--gxcgpliorr,' '- ----:--:-Iule' teljlgmption it-tl5

2. He q,ho claims an exemption from his share of the commonburden in taxation must justify his crairn uv ,rro*irf ttut trr"legislature intended to exempt him by words too plain to bI mistaken(surigao consolidated Miiing co., Inc. u. cirtector of internalReuenue, et al., L-14gfg, Dec. 2b, lS6S).

118 119

I)OIJtlt,14'l'AxA'l'loN ANII'lAX ITXUMPI'IONS

li. lt, is ir w0ll settled rule that he who claims exemption should

r,r'()vr) by convincing proof thq!*-h"g !p exgmpted (Visayan Cebu

l't'ilni.tlal Co., Inc. u. Commissioner of Internal Reuenue, L- 19530 &t t9,144, Fe,b. 27, 1965).

4. Tax exemptions must be s!11c-L=b:s1{,-q!-ry-gd such that the,.xemption wiII n-ot be held to be conferred unless the terms under*hich it is granted clearly and distinctly show that such was the

rrrtention of ttt" parties (Philippin'e Acetylene Co', Inc' u'

(tomrnissioner of Iniernal Reuenue, L'19707, Aug' 17, 1967; Manilat,)lectric Company u. Vera, etc., L-29987, Oct' 22, 1975; Surigao(:ctnsalid.atei runng Co., Inc. u. Collector of Internal Reuenue,

r,l, al., supra). Tax exernptions are not presumed (Lealda Electric

r:o., inc.-u. iollector of Internal Reuenue, L'16428, Apr' 30, 1963)'

5. Constitutional grants of tax exemption are glf:exeeuiius' The

rcason for this is thai a constitutional provision declaring certain

lrroperties as tax-exempt does not need a legislative enactment to

irut'it into effect. This is in'consonance with the presumption thatprovisions of the Constitution are generally self-executing; otherwise,

it *itt be within the power of the legislature tq--lgqgte or practicallynullify the directions of the fundamental law (opinion No. 130,

S. 1987, SecretarY of Justice).

6. In much the same wav that !q49p ry8l.99='4qLtql -e-4glqgigryare likewise personal. For exarnple, under sec. 282 of the Local

6;;;;;-""t ft"-gnTtfions, exemptions from local Laxes are obtained

through the issuance of a Jax exeropl-Lo-rr--cqfJ{igatg -and the

,egulalio.rs provide that the same shall be nof]'tr-a'lferable'

?' Deductions for income tax purposes partake of the nature of

the tax exemptions; hence, if tax exemptions are to be strictlyconstrued, then it follows that deductions must also be st-f-tc-llV

consBUed.g. The rule of strict construction of tax exemptions should not,

for obvious reasons, be applied to organizations performing strictlyreligious, charitable and educational functions'

It should be noted in this connection that this rule on strictinterpretation also does not apply in cases of exemptions granted infavor of a government political subdivision or instrumentality(Mq.ced.a u. Macaraig, Jr., et al., G'R' No' 88291, May 31' 1991)llkepublic corporations.

9. A claim of exemption from tax payment" tqq-9! ]9 'Jqqly-plgyq

and based on languagl in t-!9-l1y-!9" llain to be mistaken' Since a

p " ;f;tt rt;fm-a'fi iF tFe n-a t u:r effi m u s t b e

tI,N W 0II t}ASIC'I'AXA'I,ION iN'I,HIi I'IIILIPPINUS

construed pJrtc_lisp-lttijptls_against the grantee. There is no taxexemption solely on the ground of equity (Dauao Gu,ly LumberCorporation u. Commissioner of Internal Reuenue, et al., G.R.{r. I17359, July ZS, 1998; A"tlas Consolid,ated'Mining andDeuelopment corporation u. commissioner of tnternal iet)entte,et al., G.-8. No. tI9f86, Sept. 27, tggS).

10. A tax amnesty, much like a tax exemption, is never favorctlor presumed in law and, if granted by a statute, the terms of thc::l:::rrl,^T -1li! "f u

lu,T, exemption must be construed-stricttv

ffi ?P\lh::tSllui-"r,ur$,l,4udly jr,__b:.orj!thet";;;;;ti##The rule on slrictlssimi jurii a - *_$}iffiapplication of an amnesty law/decree should be resoived in favor or.the taxing authority(-commissio*er of Inter*al Reuenue ut. court ofAppeals, et ql., G.R. No. 17g|f 6, Jon. 20, lggg).

-11' Finding petitioner's craim of immunity from prosecutionunder the shield of availing of a tax amnesty untenabre, the courtheld that "(h)e did not meet the twin requirements of p.D. 1740 and1840, i.e', declaration of his untaxed income and full payment of taxdue thereon. clearry, the petitioner is not entitled to the benefits ofP'D' Nos. 1740 and 1g40. The mere filing of tax *-rru"ty returnunder P.D. Nos' 1740 and 1g40 does not rpso /ocro shietd hirn fromimmunity against prosecution. Tax antaxpavers *lthout iaving to *" r*affi"tlcase. To avail of a tax amnesty granted by the Cou"rn_irrrt, and tobe immune from suiton its deiinquencies, rh; ;;p;;1"'_u.t rr"u"voluntarily disclosed his previousiy untaxed income and must havepaid the corresponding tax on such previously untaxed income,,(Bafi,as, Jr. u. Court of Appeals, et al., G.R. *o. tOi^6i, iii.- to, 2000).

ILLUSTRATIVE SITUATIONS ON TAX EXEMPTIONS1. The following are examples of existing tax exemptionsclassified as to (a) tax on person, (b) tax on property, and (c) tax onexercise or privilege.(a) Tax on person - The residence tax (now known as communitytax) which is a personar tax is not imposed on dipromali. ura.orrr.,r""representatives as well as transient visitors when their stay in thePhilippines does not exceed three (B) months (sei. iig, to"orGouernment Code).

. Q) .!yx on Property - -Real

property owned by the Republic ofthe Philippines or any of its poliiicai subdivisi"". p-"iaed thebeneficial use thereof is not transferred to " t"*iui"-p""ror'charitable institutions, churches, parsonages or convents

120

I)OUI]I,t' 1'NXA'IION AND'I'AX UXUMP'TIONS

,r;r1r.r'l,cnunt thereto, mosques and all lands, buildings and,,,,t,r()v(rnents actually, directly and exclusively used for religious,, l,,r r rtrrlrle and educational purposes are exempt from tax (Sec. 39[a],I ,,,,r1 (i<tuernment Code; Sec. 28[3], Art" VI, Constitution).

(ct 'l'ax on Excises and Priuileges - Under Sec. 103(b) of the Taxt'r,,lr, (now, Sec. 109[c], 1997 NIRC), the sale or importation of

'r1,r rcrrltural and marine food products in their original state are

,.,i,,rrr pt. frorn value-added tax.:l It has been held that a condonation of unpaid tax liabilities is

rrr tlrc nature of a tax exemption. Hence, if there is no clear-cut;,r,,vision in the law condoning such liabilities that taxes alreadyt,,rrrl :lre also condoned (so much so that the taxpayers thereof wouldl,, r'rrt,itled to a refund), then no refund of the paid taxes is authorizedl,r'r'nus€ exemptions must be sustained only when expressed in, "1,licit terms (Surigao Consolidated Mining Co.,Inc. u. Collector ofIrttr,r'rr,ctl Reuenue, et al., ante).

:1. Where a corporation engaged in a certain industry obtained,.{,.rnption from all taxes "directl.y payable in respect to saidrrr,ltls{,1y," the following taxes may be within the scope of thet ,r x'exemption: tax on products manufactured for the industry; the,, r'rrp&tion or business tax thereon; the import or compensating tax(rrow known as VAT) on machineries used therein; the tax on thel,,rsoline and oils necessary to move or operate its machinery as weIIrr:; the purchase of the original site for its plant. But the acquisitionl,y clonation of lots, contiguous to the original lots, after the operationlrirs lasted a few years, is no longer exempt since said acquisition isrr,rt directly related to the industry (Collector of Internol Revenue u.

fr'lurcela Steel Corp., et ol., 100 Phil. 271)..1. In the case of a corporation that is engaged in the manufacture

,,1 lrlywood, its tax exemption extends <intry to "machinery and,'rlrripment to be used exclusively in the new and necessary industry,"rrrrt, "rnerely in conneclion therewith." Hence, is it also exempt otttlte "transportcttion t'acility" used irt. connection with its business?'l'lre Court rr.rled in the negative. The Court said that with or withoutt,lre taxpayers owning any transportation facility, the tax-exernptrrrdr.rstry could be operated (Plywood Industries, Inc. u. Arq,fi,as, etc.,l,- 1 6466, Mqr. 3 1, I 964).

5. Where the taxpayer receives as part of the purchase price oflhe land expropriated by the Government, tax-exempt bonds issuedunder R.A. 333, such tax-exempt bonds should be included in thetotal purchase price in order to determine the correct taxable profitbherefrom, i.e., profit arising from the expropriation sale. This is so

L27

LAW ol,' BnSlO,t'AXA,t.lON tN .l'llt,l l,ilU,lt,l)tNIrS

rvrr lJ llJ

:yi,,-:l tl:,::_.ltles to ta1 as in the case of uI tu*puy""

" (tvirofon,

li.,? !, ! ; r:: y ::' * n e r .

o f r nt e r n at R e u e n u ", "

t ii.',' 8."i.' i;." ;;;;i ;i,July 23, 1987 fResatution]).7' The exemption of the contractee (wo4d Hearth organization)from ail "indirect taxes" as provided in the Host Agreeor"'rrt u"t*""nthe Republic of the philippines and wHo shoura tel-pi"-".rt"a tomean that the entity or person exempt is the

"orrt"u.i-o" itself whoconstructed the buildiag owned by the contractee (commissioner ofInternal Reuenue u. John Gotaico s, s;;;-i;i.',"i""i.,"t-sI0gz,

Feb' 27, lgsr). This does not viorate the ruie that tax exemptionsare personal because the manifest intention of the ug";-"rrt, o,stated earlier, is to exempt the contractor so that no contractor,s taxmay be shifted to the contractee WHO.

^ 8' A.tax exemption in the manufacture and. sare of machineriesfor making cigarette paper does not incrude the manufacture andsale of the products produced bv the machine Nr;i;;-M;tchanicarErugineering Corp. u. CTA, et it., t _iZeOS and L-2TgSg, June J0,I e75).

9' In the contract c_ove:ing the construction of the Mactan Airport(the contractor was p.J. Kiener & co. Ltd.), it *a" piouiJ"l-tn"t ,,rrotax of anv kind or description wilr be

'revied ;;;-;"teriar,equipment or supplies which may be purchased o. ott

"i*i.u u.qri""ain connection with the project .r.rd"" the contr&ct.,, Does thisexemption include the-tax on the petroreum pr:oaiii, uJ"a ro th"project? The court ruled in the negative. The court said that the31! itels

,elempt are those malerials o" .,rpfii". ,ihi"h u""rncorporated in the construction of the airfierd "r"h ,r

-*ortar,cement, sand, bricks, etc., but not the petrole"* p"oJ""t. i"r,i.r,

""unot materials or supplies since they do not go into or are consumedin the construction of the project b.,i-r"" used in the machineriesand equipment (cammiss{oner of Internar Reuenue u. p.J. KienerCa., Ltd., et al., L-24f54, July lS, tifb.10' The exemption from income tax on Base-connected income ofnon-resident American Base personnel under ttre u.s. gasu" r""utydoes not extend to the income realized fiom the sare by an American

because tax exemptions are strictly construed (8. Rodriguez, Inc. p,Collector of l*ternal Reuenue, et ai., L-ZS04t, July Jl, igiil6' The salaries of judicial officers are not tax-exempt and thoirtaxability is not contra-ry to the provisions of sec. 10, Art. vIII of tho1987 constitution on the non-diminution of the salaries of memb.rrof the Judiciary during their continuance in office. The clear intontof the constitutional commission that iramed the constitution is t,

I

122 L23

lx)LJ llt,lt'l'AxA'l'l()N AND'l'AX !;XEMI'}TIONS

, r t,r lrr n Ilase employee of his car inside the Base to another Americanirrrtronal (Reagon u. Commissioner of Internal Reuenu.e, L'26379'I t,'r' 27, 1969).

t t. Art. XVIII of the Bases Treaty exempts from tax the grossr.r .r1)ts of a Base concessionaire from the business of hauling andt r rr rrsporting of cargoes inside the Base belonging to the U.S. Army(t'ttn,las, et a.l. u. Republic, et ol., 103 Phil. 712).

12. Where an electric iight and power franchise holder (Meralco)r,, r,xempt under its franchise fronn property tax on its poles, wires,tr rrrrsformers and insulators, its exemption does not extend to the, ,,rnpensating tax (now, VAT) on its importation of said articles. Said,,,rrrpensating tax (now, VAT) is not a property tax but an excisetirx. Exemptions, being highly disfavored in law, must be strictly.rrrstrued (Meralco u. Vera, etc., supro).

13. Where it appears that under a certain law (8.A. 79), atacilag, lub (Manila Jockey Club) is "exempt from the payment of anyrrrunicipal or national tax," such exemption does not include,'xemption from income tax on the rentals received from the lease ofrLs race tracks to the Philippine Charity Sweepstakes Office. Thesl,atutory exemption covers only taxes in connection with races liket.he municipal license fee of ?600 per day of racing and the ?500I'ixed tax for each day of racing under Sec. 193, NIBC (now, 30% taxon gross receipts under Sec. 125[e], 1997 NIRC). Tax exemptionsare strictly construed (Collector of Internol Reuenue u. Monilo JockeyClub, Inc., 98 Phil. 670).

14. R.A. 1435 allows a partial refund (i.e., tax exemption) of 25o/o

of the specific tax paid on fuel oil used in the operations of forestconcessionaires. Since tax exemptions are strictly construed, theexemption refers only to the operations of forest concessionaires,and not to oil used in the operation of sawmills (Insular Lumber Co-

u. CTA, et ol., L-31057, May 29, 1981).

15. In the case of two electric power plants, which are operatingin the same locality, it cannot be presumed that the.exemption ofone should also be enjoyed by the other' Tax exemptiQns are neverpresumed (Dauao Light & Power Co. u. Commissioner of Custorns,et al., ante).

16. Inasmuch as under the Bases Treaty only sales of goods "forthe exclusive use in the construction, maintenance' oper&tion ordefense of the Base," i.e., only sales to the U-S. quartermaster areexempt, it follows that the sale of oxygen and acetylene gases to theVOA (Voice of America) is taxable (Philippine Acetylene Co.,Inc. u.

Commissioner of Internal Reoenue, et ol., L'19707, AW. 17, 1967).

,rJ';J"T;ff?I"'il"" are strictlv construed. Th-erefore, if what thrs".. reo r;;; s;;-;#Ti""):l:::.* '.i11i*,- vAr)

""au" tr,un

rrlrw (rt,. trnslO,l.AXA,l,lON lN,l,lil.: lrllll,llrplNl.;S

s e c. r e 0 (no w, sec. r,; ;, i ; ; i;; ;;' iE "","in

)iZ; b,"ffl "J,l*:"l[:land/or cargo,' vessers, ;'h;;1ii;'b;;;i,iuru-rot within the scope ofthe exemption because tugboatsri" nJt .r"*a for carrying passengerlor cargo but onlv for towing ,rt "i ""rr"il" (Lu-"on S;r"-aiioe corp,u. CTA, et at., L_J0z3z, nt1'.ii,"iig;;:;*. a,owing tax exemptioua re co nstru ed sr ri,iss i m i j u r i s f c ii

^i r.r^* i "

r ri- i;;; ;;;-,R "

u "

o u,

Yfi[i:;;;;"'.::t:',;!,ti,iiii{ili;;6{,iiili! j;;;r;1,

TAX-E*EMPT PERsoNs RE',TRED To KEE, Boors ort:,:-:"',H';*n.l,yii:;";:""Tji'sratusa*,",,l,stirythe,*r ,""I*"?Ji,

"r s!;, ffi ,;i;:"i",.tLTol. r"":llffi lXT,tjliprovision of existing g";"ui ;r-speciar r;-* i" ii" contrarynotwithstanding, ttre u'oo'ts or;;.;;;. and other pertinent recordsof tax-exempt organizati"rr ""

g"r"tees of t-ax incentives shall besubJect to examination by trr"'g;r""u of Internar Revenue forff#ffi ""[::iTnT,'Jr-,TIJj:ffi ,]itr,tr,u*"Tr',r*,"laerwhichtax liability, if r'nr." - Is or tex incentives, and their

TAX AVOTDANCE; TAX EVAS.TpN; TAX FRAUD. Tars' u oi ,s n,,is-rh e m i n i m i z i t i r "

r r t - ii* u, i t i ". -t

h ro u gh re ga l m e-a ns.Ii:,:i:" means used to *i"i*ir" ,u*u, u"" ,r.egar,-ii -il.;anau

,o,Tax avoidar."

11v, U" illustrated, as follows: Suppose that A,sincome frorn his oroperty reaches th" ,nu*i*um rate under the raw.To avoid this, he aon"t"r;;;:ilr';"hi.

""."t, to ,, "ir.ational

institution that ouarifi"; i;;r* "-",ortion ,rrJ"" i'rrire". rrsl,Art. xrv or the'consitt;;;";i#,aonu" ;;t";

".iJr,-"to"r.,non-profit educationat i".tiiulior'*rr"l income and assets areactuattv' directrv ,"a "*.ruri;;i;';; for educationar purposes.Having thus transferred said ;r;; dii".""ro"", succeeds in avoidingpavment of the tax

9n.the i".r-" i"riuua tn"r"r" o^. uii-ioout thedonor's tox? rs A tiabte-tieffi;iH,i a*"rrilr"J?o.0", "r,,

donor's tax on the donated *op"rtv, o"""ia"a the folrowing requisitesIbr exemption under S"".'g<trjiij'f;;, sec. t0t[AJts]) otrhe TaxCode concur: ( 1) Donee instituiio" i. ,'".r,r"r,

""ii"*,J "?,-lnir,"".ity;(2) It is incorporarea ,, 3.r"r:;;*k, ion_profit enrity paying nodividends: (3) It is governed uy tru"t"us who receive no compensation;

124

DOUBLE TAXATION AND TAX EXEMPTIONS

tlr /\ll il,s income, whether students'fees or gifts, donations orarl,,rrrlrr.s are devoted to the accomplishment and promotion of thel,rr r,():r(,s enupe.rated in its articles of incorporation; and, (b[q.trr,,rr. Lhan @9 of the gift shall be used by the d.onee'-forBrlrrr r rr rsLr&tive purposes.

'l'rr x uvoidance is not forbidden in our jurisdiction. According tolrr. 111'gi6lsd case, an attempt to minimize one's tax does notr',r r'.r.urily constitute fraud. It is a settled principle that a taxpayerrrrrr y rlirninish his liability by any means which the law permits (Hengl\'trs'l'extiles Co., Inc. [Philip Mfg. Corp.] u. Commissioner of Internallitrcn.Lt€t et al., L-19737, Aug. 26, 1968).

Moreover, as stated by the U.S. Supreme Court: "To avoid is legall,ul to evade is illegal. The legal right of a taxpayer to decrease therrrrr)unt of what otherwise would be his taxes, altogether avoid. them,l, y r r r c&ns which df_e ]AU:-BerI0*s-_sannat_bs_{olbted- ( Grego ry u.tl,'locring, 29 U.S. 465).

'l'a.x evasion may be exernpiified by means of. tax fraud, or the,r:;r'of deceit in order to evade taxes. Fraud, however, is a serious,lurrge and to be sustained, it rnust be supported by clear and, ()rrvineing evidence (Republic u. Ker & Co. Ltd., L-21609, Sept. 29,t 966). Fraud, being a question of fact, must be aileged and proved1t iutierrez, et al. u. CTA, et al., 101 Phil. 713).

Illte=4elstqrqr!-s:uhpl}er-tg-rr4-9g-qle,-FLbs-!e;r99q"{qq!&rq,,;hould control. When the purpose of a taxpayer, at least in part, is1,, evide--[il-ei, the court should exarnine with particu].ar care thelbrms used by him for the sccomplishrnent of his purposes and if hisrngenuity fails at any point, such court should not lend him its aidlly resolving doubts in his favor (51 Am" Jur. 45).

Our jurisprudence includes cases where tax evasion or fraud wasf'ound to have been perpetrated. For instance, in one d.ecided case,it was held that the failure of the taxpayer to declare for taxationpurposes his true and actual incorne derived from his furniturehusiness at Clark Airbase for two consecutive years is an indicationof his fraudulent intent to cheat the Governrnent of taxes (Republicu. Gonzqles, L-17962, Apr.30, 1965)"

In another case, the Co,rrt described the taxpayer's fraudulentactuations in these words: "The net income underd.eclared in 1946ls rnore than 100% of the net income declared. trn 194?, theundeeiared net income was more Lhan 1,079% of the net ineomedeclared. In 1948, the undeclared n"et incorne was 260% of the netincome declared. In i 950, the undecl.ared net income was rnore than1,00070 *f the declared net incorne. We have no iresitancy in

l,n w ol.' tlAsr() 1.AxA,t,roN rN,r,ilr,: I,ilrr,rI,r,rNrr.s

,:L:::#:":HX ::l1l ly1 :10,", the ci rcumsta nces, such h u sa

*,f,:1ffi J;f;* j;taIi:t3li,i:T jlilfi Iili,"",t"*ffi :f }:frwhich would ne to mister'jrerrect trom any conduct the likely effect oiu. Reyes, 104 Phit. ,t;;;;;:::.;,1."u, (cotteetor of Internat R","nuo

,,.01T"1.1:n :::,f,, II i:, J; xisred i n rh e rouowing case : rh n

:?.ff i#Jilx':J,llx'il$r#"],,T];il?i,l';???f :J[:I,,XTwhen he actuallvhisact,";;;;,H'"f,:^,^,:ltitiii:i?#fr:#;:,."i??"'3#;f :1tl jffi ?i:;ii"Hilt'1iii:!t;:!i,',il::"Ifir"r" j:..lJ,fl ,?;R e u enue, L - I T f 1 s, r, ilr:"r?rtfi ud (Au elino u. C o llector o f Internil

Where it appehad wilifulry ffi;*r""r'li:11:,r::llr"r, although on accrual basis,worth almost ff OO,OOO

^:: :r.,rv?.1-rncome by treating copra outturn"when-in

fact such copra i"Y::: :tjlloutstanding at the end of 19b1,

i:iii:srffffi:H:":l*:*r#:ff i:it'i,"l,'J:""::1?:":iIif the taxpayer includea

"rll; 't'urthermore, such fraud is aggravated

for 1952 thus eventu"il;;:1:i1,"::.1tturn in its beginning inventory

i?Xtri:,#,;?n,Jj'l.;#ff ::il?J:lilf ;ff :,(;H,,1;"Tli:;;Looking at the o,ilJ]':' L'::731' Mar' 31' tiob)"'""*"'

there was no fraud. i" tfr"."ll,ot the question, it was determined that1. The fact thr _ - 'Qllowlng cases:

is statedli ;; ;::aff ,"Jl:" ordeceden_rs shares of stock (which

lffiil{X,:;t?iJff :1;:ji:i.,:[":]fi:,""T"fi1T,,,ff ff:]#Ji?value. Mere differ"""" oi-^j.nares of stock frequently fluctuate inassessing an intentio, to all'''o.n ganltot serve as a proper basis forof cesar ratand.oni,

-, ,.d;;:U::;F,T;iifent (Repubtic u. Heirs

2. Where taxprdiffers from rhe ,;iJ;r1:.ratuation of certain rice and susar tandsRevenue, there is

"" b;J; Pla" by the Commissioner oilnternalvaluation is only basea ,ri

co rmpute flayd where the difference intaxpayer made a -i"takl';*qn honest difference of opinion. If themistake (Republic r. Aa* it tfluation, the same is only an honestnoted that an honest irrt""Lr Lesor,lalandoni, supra). It should beca se, it wa s h eld tha t w he re ;T#r#:rf ;:,ii:i::";hfr* Jill;

126 127

I)()T]I}I,I.]'IAXATION AND TAX EXEMPTIONS

--1r1,1,,1,r'tl by him in computing his tax liability is correct, he doesl',r rni'rrr ilny fraud, in which case, no fraud penalty attachesrr,,rrrnrr:;si.<tner of In.ternal Reuenue u. Visayan Electric Ca., et al.,t "t;t l, May 27, 1968).

t lfurthermore, where it appears that the underdeclaration oft,rt,ilrlc property is only inconsequential and is the result of thet!,rt,iryur's inadvertence, no fraud exists. The following cornn"rents,,t tlr,.Supreme Court in the case of the Republ.ic u. Heirs of Cesar

t , , 1 , t rt tlani, onte, illustrates this point:"x x x (OX the seven lots alleged to have been excluded

I.r'orn the return, three were actually included with thep:rrticularity that they were the most -,'aluable, to wit: Lot.11)ll with a market value of F21,630.00; Lot 521 with a marketvrrlue of ?80,000; and Lot 229 with a market value of P12,000,while another lot was not also included because it belongedlo Delfin Jalandoni; or Lot 228 which, includingirnprovements, has a market value of ?16,900.00. Hence,lrorn the foregoing, we find that the aggregate value of theaf'oresaid four lots is F86,610.00 which if deducted from theLotal value of the seven Iots amounting to ?90,110.00, givesa balance of ?ts,500.00 as the value of the three remaininglots. These three lots being conjugal property, one-half[hereof belonging to the deceased's spouse should still bededucted thus leaving a smali balance of ?1,750.00" trf tothis we add that, as the record shows, these three lots werealready declared in the return submitted by BernardoJalandoni as part of the property and his wife for purposesof income tax, there is reason to betrieve that their omissionfrom the return submitted by Cesar Jalandoni was merelydue to an honest mistake or inadvertence as properlyexplained by appellants. We can hardly dispute thisconclusion as it would be stretching too much the imaginationif we would find that, because of such inadvertence, whichappears to be inconsequential, the heirs of the deceaseddeliberately omitted from the return the three lots with theonly purpose of defrauding the Government after declaringtherein as asset of the estate property worth ?1,324,555.80."

4" A tax return which does not correctly reflect income noayonly be false but not necessarily fraudulent where it appears thatthe return was not prepared by the taxpayer himself but by hisaccountant and that after the original deliciency tax assessrnent wasmade, the sarne was subsequently reduced by the BIR by a

substantial amount. Hence, the 50% surcharge for fraud may be

(

r I,AW OI.'tsASIC TAXAI'ION IN TI{U I'HILIPPINES

dispensed with but the tax may still be assessed within thoprescriptive period of ten years from discovery tbercof (Aznor u. crA,et al., L-20569, Aug. 2J, 1gf4).

It should be noted that in the abovementioned case, the taxpayer,odeficiencv income tax was assessed. and. d.etermi".d ;iJ;;;h the ueeof the so'called "net worth" method, or what is otherwis"irro*r,

"uthe "inventory method of income tax verification."5. In a certain case decided by the tax court, the ruling was tothe effect that where a coupre in ihe philippines

""""irr*a a dolar

remittance check from abroad in the.*orr.,i $t Miuiorr, said amountbeing the result of an error of the remitting bank as the sum thatwas actually supposed to be remitted was only Et,O0O, if it appearssubsequently that said coupre spent the differeo"" or $ggs,ooo onvarious purchases of property both here and abroad for their ownmaterial benefit, said sum constitutes taxable income.

However, no fraud was imputed against them since in the incometax return, the amount in question was declared with the notation:"Taxpayer was the recipient of soroe money from abroad which hepresumed. to be a gift but turned out to be an error and. is now thesubject of litigation." No fraud existed because the taxpayer hadIiteraily laid his cards on the tabre (Metchor Je,uier u. comiissianer,C'I'A Case No. 33g,?,,luly ZT, tggs; Comm.issioner of Internal Rerenueu. Jq.uier, Jr., et al", G.R" No" VggSS, Juty 51, lggl).

CASES

MANITA ELECTRIC COtif,pANy v. VERA, ETC", L-zgg8?,0cT" 20, t976

FACTS: Manila Erectric Bail and Light co. (Merareo), holder ofa franchise to constmct, maintain and operate an electric right, heatand power system in the City of Manila, imported

"oep*1 wires,

transformers and insulators for use in the operation of iii businessin 1962. In 1968, it again imported ccpper wires, transformers andinsulators to be used therein. Both fmportations were subject iocompensating tax (now, VAT). So Meralco, after paynaent thereofclaimed its refund which was denied first by tne n'rd urJ iut"*, o*appeal, l:y the crA. frIeraico eraims thst ttre irnpoJations aretax-exempt under its franehise. Is &{erarc*'position eorrect?

HE{,D: The Court ruled tha* &{eralco's positioar cannot besustained" one who claims to be exeurpt fmm paymen& of a fa*icular

128 r29

DOUIJLI' TAXA'TION AND TAX EXEMPTIONS

r.! r.usl, tlo so under clear and unmistakable termg found in the.,1 tr r r r I r, 'l'ax exemptions are strictly construed against the taxpayer,rl,,.y lrr.in11 highly disfavored and may almost be said to be odious toI1,,. irrw.

l'r,lrt,ioner's franchise exempts it from the payment of propertyl.q .n i[s poles, wires, transformers and insulators, but not from1,, l r r r r ,n t of taxes, like the one in question which, by mere necessity*r r rrrrir)euence alone, fall upon property.

Il rs a well settled rule that a compensating tax is not a propertyrrrr lrrrt an excise tax. An excise tax is one that is imposed on the1,r.rl.r'rrl&[ce of an act, the engaging in an occupation, or the,. r r 1.y rnert of a privilege. A property tax is a direct tax, whereas onel, r,rr.rl on property because of its use, is an excise tax.

t,I(OCTER & GAMBLE PHILIPPINE MANUFACTURING{ '( I It P" v" IVIUNICIPALITY OF JAGNA' PROVINCE OF BOHOL't,'1,t')66, DEC" 28, 1979

/ACTS: Plaintiff company appealed from a judgment of the('rrrrrt, of First Instance of Manila, BranchVI, upholding the validity,,1 ( )rclinance No. 4, S. of 1957, of the Municipality of Jagna impoeing,, :rt,orage fee of F0.10 for every 100 kilos of all exportable copra,1,'l,risited in its bodega at said municipality.

'lhe issues raised were as follows: (1) Whether or not the,lrr.stioned ordinance is valid, legal and enforceable against the;,lrrintiff; and (2) Whether or not plaintiffs action to recover the taxs,rrid under protest pursuant to such ordinance has prescribed.

HELD: The main question to be determined is whether or not,lt,fendant municipality was authorized to impose and collect the,rl,or&ge fee provided for in the challenged ordinance under the lawsI lron prevailing. The law then in force (C.A. 472) provides as follows:

"Sec. 1. A municipal council or municipal district couneilshall have the authority to impose municipal license taxesupon persons engaged in any occupation or business orexercising privileges in the municipal district, by requiringthem to secure licenses at rates fixed by the municipal councilor municipal district council, and to collect fees and chargesfor services rendered by the municipality or nnunicipal districtand shall otherwise have the power to levy for public localpurposes, and for school purposes, including teacher'gsalaries, just and uniform taxes, other privilege taxes andtaxes on specified articles."

Suid provisio

i::"r "J;;;;: t.,ll['fi-:lt3;i::l1l or ricenses rbr regurarionrrcense tax or f.. ";;;;;:;iffj::uestion is actually a municipaltt, u p"i',rlt"'s; #1."^:-'"""ons, fi rm s " rd

"o"po"ar;;;, ht;jurisaicti-oT. oo;""t^"^:'"*

copra in u uoausu ;i;;ffi'il:,ke exercisins

copra is properlv .",o"ui.tr," t"-J;;."::ga within the m u n icip a I i t)/;

$hTHTh;:,1trH{"j:,r'ffi *il{l:,}ilhlll*i",ffi- .

Plaintiffs aveis inappiic;';i;;:"P"nt tha+" the ordi

ll : u p

", i " ; ;fi # l,_

u ". "

u. u "i

t" ;' ;ffi ; !H", f H :' il ff I """1,,j;;::ffi ::,.,,""'xl,tli._rlii!J,"j,_rlii:!;uu,io".,ryi;.;;#*coprain

m,,m

*"*g***rm$.rm*x**

fr*,fi5$fl||$g[Hrl'd'[,*lx,H,:#$130

131

I)OUITLE TAXATION AND TAX EXEMPTIONS

llflirl) r'r rrrrt'lrority for the view that the period for prescription cfHt lt,ttrr l,o recover municipal lia";;'r".es is six years under'1 r I I I 'l r'(2) of the ci":r c"aul irr*, ,r."r"tiff s action brought withinarc 1't'111' lrom the time the right#;;i;; first accrued in 19bg hasIlrl yi.l prqsCribed.

lv /l ' '['he prescriptive period now for the recovery of local taxesrd r, l,,,,rrs (Sec. 194, iocal A;;;;;;;i"ioo"l.iIII \I.'\N. ., O!.^.,U-. COMMISSIONER OF INTERNALr r r, \, r,, N r r rr, Er AL., c,n. NoI ;r;ffi;;J; 28, 1e8z (RESoLUrroN)

i,, I l,',i ""1;'l'1"::jr.1,"lv appointed a nd qualifr ed Rrc j ud geslrr I\lrrrrrlA, Seek tO D

-' --'' qvlJvruuts(r arltr qUalllled I('IU JUClgeSIr rrrsl 11s1,Lir.,, "._ ,;Lo^libit and/or perpetually enjoin respondentsl::;:;::l:l*:ff y_*1""i;;f ;,,,hffji"'#i,J";ililiJ""'1,"Tff :,jt,rrl.rrrling that this ".,r,"tii,,i^l';.::]l?."rts^rruru

unelr salartes,ri,,r lg. Art- vTTr r"lj}"'ilYtes. diminution of salary contrary toj,'r lo, Art. VIII, lggz c".".r*,,*l'-:-'-'Jl-""" ur $arary contrary toI rlr. r,erlbers nr ,r1?:-l"rnution, which provides tt rtifr"

""tu"y: I l,, : I i' ;, : :' ;,T:; f..',i lt s

" o

"L #'c

"ffi :";'u'jTJ;::"# ffJ :: :3lT:',1',rll l,t: fixed by lu* ,.,Jii;;;r:::'j a[q Juqges ot lower courtsrrr,.11 ..;11211, oh.rr -^j

and that "during their coitirrrrurr"" in office,I tr,'r r 51[s1y shall not U" a""i"urJj.,,lll')LD: The salaries of the chief Justice and Associate Justices"l llt. supreme court.as well-as-il;; of judges of inferior courtstt t 't' l111s,s' The crear i"t""t orfi" iioi*,ir.,rional commission wasr,,,rr,rcre the proposed

".r;;;;;;;;ii"."_ption from payment of,'|, (,rre tax to members & trr" *il;;, so as to give substance to"'1r'rlity among the threet;il#r rido.,,""rr-".t. In the course oft lr' rlcliberations in the c"*;iffit"*ltommis"ion, it was expressly""r'l' clear that the "utu"ruloi;;ffi;r of the judiciary would be'rrill.ut to the sener1lln9o.m;6.;;ffid to au raxpayers. settled isrl"' I'undamentar principle thalJi'"lrr"r, of the framers of the,, r l,;r nic law and of tl,,,,, t, turi n ifi ;;;:; T:1,.:r #' ;i:,i :ii:rti ; :;; "Xerr e ct ( G o t d.

t',wtMISsroNER OF-INTERNAL REVENUE v. MITSUBTsHIli,'Jlo"

coRP'' nr ei. c]il*tt.^JnrO8 and 80041, JAN. 22,

FACTS: Mitsubishi Metals Corp. (Mistubishi), a Japanese'ttrporation licensed t" a" u""i"";;"rh" philippines, entered intorr l'oan and sale cortract *trh"dil consolidated Mining anclI )r'velopment corp. ta,r".i ii,"""oi iili."bishi lent $20, 000,000 forllrtl expansion of the_lattu"'. -ir"",'*.ri.rr"rly the installation of arr('w concentrator for copper p"oar"tiorr. Atlas, in turn, undertook

LAW OF BASIC TAXATION IN THE PHILIPPINES

to sell to Mitsubishi all of the copper concentrates produced bymachine for 15 years.

For this purpose; Mitsubushi applied for and was granted aby the Export-Import Bank of Japan (Eximbank) and a consortiuof Japanese bahks. As agreed upon between Mitsubishi and Athe latter gave interest payments for 1974 and 1975 amountingP13,143,966.79, with the corresponding 15o/o tax thereon withhand remitted to the Government as required by the Tax Code.

On Mar. 5, 7976, Mitsubishi filed a claim for tax credit ofsum of Fl,972,595.01representing the tax withheld on the intepayment. That claim, not having been acted upon by the BIMitsubishi then filed a petition contending that Mitsubishi wasmere agent of Eximbank, a Japanese Government financiinstitution which financed the loan. Such governmental statusEximbank was the basis of Mitsubishi's claim for exemption fpaying tax on the interest payments pursuant to Sec. 29(b)(8)(now, Sec. 32[B][7J[a], 1997 NIRC). The CTA granted the taxin favor of Mitsubishi, which later executed a waiver in favor of A

HELD: The principal issue in both petitions is whether orthe interest income from the loans extended to Atlas by Mitsuis excludible from gross income taxation and thus exempt fwithholding tax; and, corollarily, whether Mitsubishi is aconduit of Eximbank.

While factual findings of the CTA are generally not disturbedappeal, a misapprehension of facts on the part of the tax court wwarrant a departure from sai.d general rule. The loan and sacontract between Mitsubishi and Atlas does not contain any dior inferential reference to Eximbank, and was, therefore, stricbetween Mitsubishi and AtIas.

It is settled that laws granting exemption from tax are constrstrictissimijuris against the taxpayer and iiberally in favor oftaxing power. Taxation is the rule and exemption is the exception,The burden of proof rests upon the party claiming exemption tothat it is in fact covered by the exemption so claimed, which onprivate respondents have failed to discharge.

The taxability of a party cannot be blandly glossed over on thbasis of a supposed "broad, pragmatic analysis" alone withousubstantial supportive evidence, lest governmental operations sufferdue to diminution of rnuch needed funds.

DOUBLE TAXATION AND TAX EXEMPTIONS

ll 1,, l't I ITLIC BANK v. COURT OF TAX APPEALS, ET AL., G.R.Nr )S. (;2554-55, SEPT. 2, t992

lt,,lOTS: Petitioner was assessed a lYo monthly bank reserve,1, l r, rlrrcy tax in the amount of (a) ?1,060,615.06, plus 25% surcharge,rr'.rrrrt,irIB to P265,153.76, or a total of ?1,325,768.82 for taxablei , ,, r lt)69; and, (b) F1,562,506.14 plus 25% surcharge of F390,626.53,,,r ,r tolal of ?1,953,132.67 for taxable year 1970. All motions for1, , ,,r.;ideration having been denied by the Commissioner of InternalIt,,r,,'11,,", petitioner filed a petition for review with the tax court,, r l.r r r f rg that Sec. 249 of the then Tax Code is no longer enforceablelr.r rrrSC Sec. 126 of Act No. 1459, which was allegedly the basis fortlrr rrrrposition of the 1% reserve deficiency tax, was repealed by theI i'rr.r'al Banking Act and the Central Bank Act. trt was also arguedrlr,rt rrr case of a reserve deficiency, a violating bank is liable for ar,,n ,l loA payable to the BIR under Sec.249, NIRC, and a penalty,'l r/l() of 7%o a day payable to the Central Bank under Sec. 106,li \ :r{;i-),

I I l,)t,D: The wisdom of the tax legislation is not the province ofrl,, ,,rrrt. lt is clear from the statutes then in force that there was,,,,,l,,rible taxation involved was a penalty and the other was'r r,rr Al any rate, the validity of double taxation has been upheld.ll,, Irr!ment of 1/10 of 7% for incurring reserve deficiencies( ,, , 106, Central Bank Act) is a penalty as the primary purposer' 11,1,6[ is regulation, whiie the payment of lo/o for the same vioiation

1 ,,, :119, NIRC) is a tax for the generation of revenue which is theI t,,r;rry purpose in this instance. Petitioner should not complaint l r t r ( is being asked to pay twice for incurring reserve deficiencies.lr ';11q always avoid this predicament by not having reserve,1,'lr,'rtncies. Petitioner's case is covered by two special laws - one,,, l,;11111 ing law and the other, a tax law. These two Iaws should receive,,r, lr construction as to make them harmonize with each other and,. rrlr llre other body of pre-existing laws. Durct lex sed lex.

N,\'r'!ONAL POWER CO&POBATION v. PROVINCE OFI .\NA() nEL SUR, mT AL., G.R" NO. 96700, NOV. 19, 1996

/,'.,1(]7S; Fetitioner National Fower Corporation (NAFOCOR),,* r'; r'ofll property in Saguiaran, Lanao Del Sur comprising its AgusIl llvtlroelectric Polver Plant Cornplex. It was assessed real estatei,q,,r.;; 1v11 said property for the period from.,Tune 14, 1984 Lo Dee. 31,| 'ri iir rrrnounting to FI54,114,854.82, aliegedly hecause its exemptiont,!,nr rllrl esLaLe taxes has been withtiralvn.

LAW Ot,' IIASI(;,t,Ax^,ftoN lN .fHE t'Hu,il,t,tNES

received telegraphic notices oflire C*it," fnO.

I)emand letters for the payment of said real estate taxes v

::li :J i::T:-d""l provincial i"uu rr"", *ith a warnir*,r, nl, nsettled, legal remedies will be resorted to. O" D"". i;,lA;0,*u w,,of Auction Sale was s.erved on p"tiiio""r with copies thereof tlposted in the provincial capitoi bril;;;; ffi';;;;;ffi;:l;:-"ll::^*Y;rti,s1a in n-ewspapers. The auction sate was scheduat 10:00 AM., July 22, tggi,at the Office of the provincial Treasuin Marawi City.

Petitioner directry filed with the supreme court the petition Iprohibition with p.rayer,for a pi"ii*i.r""y injunction and/temporary restraining order (TRO) "":oi"i"g-"J.o"ra""r_'i::::::j.:q^Tll,!h:,"uction of-subsecJ properties. However,auction sare was held as schedured, iriilriir"'p";. i,,."'riillT;sur as the sole bidder' A certificat" orrriu was issued and resisrrwith the Register of Deeds

"" th;;;;;;;;. tiiJil5"Tf,:":;day,. respondents provincial so""i;o; and. provincial treasJ

Petitioner contends that it has never been effectively depri::_,* j"1.T_r:.1_1y.lr. exemption,

""J 'which,

";;; ti lJ*ior"withdrawn, were just as quickty "".to""a.' ti";;##;"j;#illil

I,#::1 ;':?t:.:iT:', 11".i"u: "* piop"*iu, were wronsruuy revieland sold at public. auction. n""p""a"";r';;r;;;iiil:ilJ",x:lpetitioner's exemption from real "riui" taxes were withdrawn olrevoked by P'D. 19s1 and had never blen_varidly restored by thrresolutions of the Fiscar Incentives R"uie* Board (FIRB) nor by thcmemorandum of Executive Secretary Macaraig, Jr., thus ,"rra""ingit liable for real estate taxes.

HELD: The main issue is whether or not respond.ent provinceand provinciar officials can validly ""J]"*rrlry assess real propertytaxes ibr the period from June r4-, rgg'to ouc. at, tgg6

^i.'ir", unathereafter se, at pubric auction trre suuject properties of NApocoBto effect collection of aresed deficien-Jies in fi," ;;6;; of suchtaxes.

on the pivotar issue of whether or not petitioner has rost its taxand duty exemption privileges, trru cr""t ruted thaiairrrrrut sec. Iof P'D' 1gB1 withdrew alr tal exemptio,i. pr"r.r*abry incruding thoseof NAP.COR, Sec. 2 thereof u"iiro"ir"a ,"J;;;;;ied thePresident and/or the Minist", oi'i"""ce to restore the sarne todeserving entities. In order to ""irr"tui"

petitioner,s tu* e*"rip*ons,FIRB Resotution No. 10_8b. *;; ;;;;"tgated, effectiv* as ofJune 11, 1984, the promulgation aui" orp.n. rgBl, r.iit'"lurr* go,1985' FIRB Resorution No. r-eo fuliy restored NApoco*,s tax

134 135

DOU ltl,lrl'l'AXA'tlON AND'l'AX lIXEMPTIONS

e;r.rrrlrtl)n o1July 1, 1985, to continue for an indefinite period. Thus,-' l,rl'' l,l O. 93 again withdrew petitioner's tax exemption,Ht.,r rtlr|less Sec. 2 thereof authorizes the FIRB to restore taxHull!,r rlrrty exemption thereto' FIRB Resolution No' 17-87 restored

rlr, ,.rr.rrrption privileges of petrtiotter, effective Mar' 10, 1987'

(',rrrsidering the entire chain of events, it is clear thatI i \ t,( )( toR's tax exemptions for the periotl in question (1984 to 1989)

lIr,l ,,ll'r,r:lively been preserved inLact by vtrLue of their restorationrl,r,,rr11lr !'IRB resolutions. Moreover, this Court tn Maced'a u'

7l't,1il (tig, Jr., etc., et at. (G'R'. No. 8829 i, .lune 8, 1993) reaffirrnedr1,,, ,l,,l,crmination tn National Pawer {'orporation' u. Prouince afttt,,rs', t't ol. (G.R. No' 87479, June 4, 1ti$il) that E'O' 93 along withl'tt 't'16 and P.D. 1731 were all vaiid, and that FIRB R'esolution1,, t'l 87 and the tax exemptions restored thereunder were valid,,rr,l ,'l'fective.

Asicle from the FIRB resolutions, sec. 40(a) of P.D. 464, the lawr I ,, .r r i n force, expressly exernpts "rea-l property owned by the Republic,,t rlrc philippines or any of its poiitical subdivisions and any

1,r vr,frrrl€D.t owned and controlled corporation so exempt by its, I'r, rl,er,"

lnasmuch as the realty tax assessntent levied against and the,,rrr'(iorI sale of petitioner's properties had been premised on

,,.,,Pond.ents' erroneous belief that FIRB Resolutions Nos. 10-85'

I f1(i and 17-87 are void, the judicial declaration of the validity of,,,rtl resolutions ipso jure remders such assessment and sale void'

,l-he assessment of realty tax being void, petitioner never became

,l,.linquent in the payment of said taxes to respondent province and

tlr. latter never acquired any right to sell nor to purchase said

;,roperties at auction. In short, there were never any taxes',lr,linquent or otherwise, to satisfy.

This decision is solely with respect to the purported tax(,xcmption liabilities of NAPOCOR for the period from June 14, 1984

r,r Dec.31, 1989 vis-i-vis its tax exemption status based on P.D..lci4, which was still good law at the time the exemption was claimed,

\vithout ruling upon the effect of R.A. 7160, or the Local Government( )ode of 1991.

CoMMISSIoNERoFINTERNALREVENUEv.S.C'JoHNSONAND SON,INC., ET AL., G.R. NO. 127105, JUNE 25, 1999

FACTS: Private respondent S.C' Johnson and Son, Inc' (S'C'

.lohnson), a domestic corporation organized and operating under

{LAW OF BASIC TAXATION IN THE PHILIPPINES

Philippine laws, entered into a license agreement with S.C. Johnsonand Son (USA), a non-resident foreign corporation based in the U.S.A.Pursuant thereto, private respondent was granted the right to usothe trademarks, patents and technology of the latter, including theright to manufacture, package and distribute products covered bythe agreement and to secure assistance in management, marketingand production from S.C. Johnson and Son (USA). Said licenseagreement was duly registered with the Technology Transfer Boardof the Bureau'of Patents, Trademarks and Technology Transfer.

For the use ofsuch trademark and technology, private respondentpaid S.C. Johnson and Son (USA) royalties based on a percentage ofnet sales subject to 25o/o withholding tax thereon. For the periodfrom July 1992 to May 1993, private respondent paid ?1,603,448 aswithholding tax from royalty payments"

On Oct. 29, 1993, private nespondent filed with the BIRInternational Tax Affairs Division a claim for refund of ?g68,226representing overpaid withholding tax on royalties paid, arguingthat since the agreement was approved by the Technotrogy TransferBoard, the preferential rate af LAo/o should be appiied pursuant tothe most-favored nation clause in the RP-US Tax Treaty (Art. 18,Par. 2tbltiiil) in relation to RP-West Germany Tax Treaty(Art. t2[2][b]).

For failure of the comrnissioner of Internal Reventre to aet onsaid claim, S.C. Johnson frled a petition with the CTA. The CTAruled in favor of s.c" Johnson and ordered the commissioner oftrnternal Revenue to issue a tax cred.it certificate for ?g63,226. TheCourt of Appeals affirrned the decision of the C,tA in toto.

?he main point of contention is the interpretation ofArt. 13(zXbxiii) of the RP-US Tax Treaty regarding the rate of taxto be imposed by the Fhitippines on a royalty received. by thenon-resident foreign corporation, which read.s "the trowest rate cfthe Fhiiippine tax that may be i.mposed on the royalties of the sarnekind paid under similar circumstances to a resideni of a third state."S.C. ,lohnson contends that based thereon, it is entitled to theconcessional tax rate of 10% on royalties, per Art. 1Z(ZXb) of theRF-lVest Gerrnany Tax Treaty. flontrariiy, the Commissioner ofInternal Rerrenue avers that the taxes upon royalties under theHF-us raN Treaty are not pair3. r"rnder circumstances similar to thoseprovided in Art. 24 of the RF-West Gerrnany Tax Treaty since thereis no provision for a 2Q% matching credit in the former conventionanei $.c. ,leihnssn cannot imr,.oke the eoncessional tax rate *n t]:est,rcngth sf thr: nrr:et-favored natr*n clause in tire i{,p-q_i$ T,ax "{'reat;y.

i Qcl

DOUBL!] 1'AXATION AND TAX EXEMPTIONS

'l'hc issue in the present case is whether or not S'C. JohnsonrtlliA) is entitled to the "most'favored nation" tax rate of 10% onr,,y:rll.ies as provided in the RP-US Tax Treaty in relation to thel{ l' Wcst Germany Tax Treaty.

t tltLD: The petition is meritorious. The phrase "royalties paidrrrrtlor similar circumstances" in the most-favored nation clauSe oftl',. IIS-RP Tax Treaty necessarily contemplated "circumstances that,, r ,. l,irx-reIated."

I n the case at bar, the state of source is the Philippines becauser lr(. royalties are paid for the right to use property or rights, i.e',I I rrrlcmarks, patents and technology, Iocated within the Philippines.'l'lr(' united states is the state of residence since the taxpayer, s.c..l,lrnson and Son, U.S.A., is based there. Under the RP-US Tax'l,r-ilgty, the state of residence and the state of source are both

1r|rrnitted to tax the royalties, with a restraint on the tax that rnay1,,' r:ollected by the state of source. Furthermore, the method,.rrrployed to give relief from double taxation is the allowance of aI :r x credit to citizens or residents of the United States (in an

',g,lrropriate amount based upon the taxes paid or accrued to thel,lrilippines) against the united states tax, but such amount shall,,,,t exceed the limitations provided by united states law for thel;rxable year. Under Art. 13 thereof, the Philippines may impose one

,,1't,hree rates - 25% af.t]he gross amount of the royalties; 15% whenr lre royalties are paid by a corporation registered with the PhilippineItoard of Investments and engaged in preferred areas of activities;,rr {,h€ lowest rate of Philippine tax that may be imposed onr.oyalties of the same kind paid under similar circumstances to arrsident of a third state.

Given the purpose underlying tax treaties and the rationale fori,he most-favored nation clause, the concessional tax rate of 10%

provided. for in the RP-Germany Tax Treaty shouid apply only if thei,trxes irnposed upon royalties in the RP-US Tax Treaty and in theIi.P-Germany Tax Treaty are paid under similar circumstances" Thiswould mean that private respondent mtrst prove that the RP-US.[,ax Treaty grants simiiar tax reliefs ts residents of the United States

in respect ofthe taxes imposable upon royalties earned frorn sources

within the Phiiippines as those allowed to their Gerrnan counterpartsrrnder the RP-Germany Tax Treaty'

The RP-US and the RP-West Germany Tax Treaties do notcorrNain similar provisions r:n 1,ux crediting' AtL. 24 of tlieii,P"West Gerrnany ilax Treatv expressly allou's crecliting against{}erman income and corporation Eax af 2A% of the gross atnou;li

'-ri

r l,nw olr IIASIO'l'AxAl.loN lN,l.llt,l l,llt l,lt,t,lNl,ls

royalties paid under the law of the philippines. on the othor ha,rl,Art- 23 of the RP-us rax Treaty, which is the counterpart pr.visi.rrwith respect to relief for double taxation, does not p.ouldu ri,,. ,,similar crediting of zo% of the gross amount of royalties paid.

The reason for construing the phrase "paid und.er simir,rcircumstances" used inArt. 1g(zxbxiii) of the Rp-us rax Treaty urreferring to taxes i.s anchorett upon a logical reading of the text inlight of the f*nda*ental purpose of such treaty which is to grant a lrincentive to the foreign investor by lowering the tax and at the samotime crediting against the domestic tax abroad a figure higher tha nwhat was collected in the Philippines.

since the RP-us rax Treaty does not give a matching tax creditof 2a% for the taxes paid to the philippines on royalties-as alloweclunder the RF-west Germany Tax Treaty, private respondent cannol;be deemed entitled to the 10 percent rate granted under the lattertreaty for the reason that there is no payment of taxes on royaltiesunder similar circumstances.

Tax refunds are in the nature of tax exemptions. As such theyare regarded as being in derogation of sovereign authority and to beconstrued strictissimijurls against the person or entity claiminglhe exernption. The burden of proof is upon him who claims theexempt'ion in his favor and he must be able to justify his claim bythe clearest grant of the organic or statute law.

EANAS, JR. V. COURT OF APPEALS, ET AL., G.R. NO. 102967,FEB. L0,2000

FACTS: On Feb. ZA, !976, petitioner Bafras, Jr. sold to Ayalatrnvestment corporation (Ayala) rz1,z6b square meters of land inBayanan, Muntinlupa for P2,B0B,rr0. upon signing of the contractof sale' ?46L,754 was paid as an initial payment, urrd thu balance ofF1,847,016 was to be paid in 4 equai annual installments with 12%interest per annum on the outstanding balance. Ayala issued apromissory note covering 4 equal annual installments payabie atthe rate of P461,?b4 starting on Feb. 20, 1977, and e.,re.y yearthereafter until Feb. 20, 1990.

on the same day, petitioner Baflas, Jr. discounted the promissorynote at its face value as evidenced by a deed of assignment. Ayalaissued 9 checks to petitioner, all dated Feb. 20, 1976, drawn againstthe Bank of the Philippine Islands with the uniform amount of ?20b,224.

In his 1976 income tax return, petitioner reported the initialpayment of ?461,754 as income frour sale of a capital asset. In the

138

IX)T1I}I,IJ TAXA'I'ION AND TAX EXEMPTIONS

,,,,,,,.r.r1ir)g years until 1979, petitioner reported a uniform income,'t tr:l:i0,877 representing \Oo/a of the agreed yearly installment ofr l(i I ,71)4, as gain from sale of capital asset. The same amount was;,';,,,r'1.r.{ in his 1980 income tax amnesty reiurn as the realiaed gain,,,, ,lrslrosition of capital asset.

( )rr Apr. 11, 19?8, then Revenue Director Calaguio authorizedItll( t.rrx exarniners Tuazon and Talon to examine the books and1r., or.(ls of petitioner for 19?6. They discovered that petitioner hadr,,,,rrrl,standing receivables from the 1976 land sale to Ayala, thereby, ,,r,,.ltrding that the same was a cash sale and the entire prolit shouldl,,rvr.been taxable in 1976 since the income was wholly earned int'rlt;. [,'inding a discrepancy of f2,095,915 in petitioner's 1976 netnr(.()rpe, they recommended a deficiency tax asseSSment Of

t'.',.173,673. Subsequently, Revenue Director Larin, herein,, :,lrondent who succeeded Director Calaguio, directed the revision,,1 llrt: audit report to have the land considered as capital asset, withtlrr. t,rrx due of only 50% of the total gain frorn the sale of the property1,,'yrrnd 12 rnonths, pursuant to Sec. 34, NIRC. Accordingly, the,l,.lrt:iency tax was reduced to?936,598.50, inclusive of surcharges,,r,rl penalties for 1976, with the demand for the same to be settled,,,rrnediately. On Sept. 26, 1980, petitioner acknowledged receipt ofrlr,. IJIR letter but insisted that the sale was on installment. on,,.,,.rmmendation of the BIR Tax Fraud Unit, respondent Larin filed,, ,.riminal complaint for tax evasion against petitioner Baflas, Jr.,,rr .lune 1?, 1981, with news reports about the tax evasion chargesl,r.ing published in the newspapers shortly thereafter.

On July 2, 1981, petitioner filed an amnesty tax return underI'l). 1?40 and paid?41,729.81. On Nov. 2, 1981, he filed another:r rrrnesty tax return under P.D. 1S40 and paid an additional amount,,1'tl,525.62. In both returns, petitioner did not recognize the landrrrr lc as having been made on cash basis. In reaction to the criminal,.,rrnplaint for tax evasion and the news reports, petitioner filed anrr.,t,ion for damages against herein respondents Larin, Tuazon and't'rrlon for extortion and malicious publication of the tax audit report,rr rrd claimed that the filing of the criminal complaint was improperlrccaus€ he availed of the tax amnesties under P.D. 1740 andI'_D. 1840. The trial court ruled in favor of respondents and awardedrlllmages to respondent Larin, which decision was affirmed by the( lourt of Appeals.

Hence, this petition, faulting the appellate court for holding that( l) there was no extortion attempt by the BIR; (2) P.D. f i40 andt'.D. 1840 granting tax amnesties did not grant immunity from taxsu its; (3) petition""'r income from the 1976 land sale to Ayala should

139

rLAW OF BASIC TAXATION IN THE PIIILIPPINES

have been declared as a cash sale since he discounted the promissorynote on future installment payments on the same day of the salo;and, (4) damages should be awarded to respondent Larin.

HELD: The Court of Appeal's factual finding that there was noevidence of the alleged extortion attempts by BIR officials other thanpetitioner's self-serving deciarations cannot be disturbed unless saidfindings are not supported by evidence. The supreme court upheldthe respondent court's conclusion that respondents could not be heldliabIe for extortion.

On the issue of whether P.D. i?40 and p.D. 1g40 granting taxamnesties also granted immunity from criminal prosecution for taxoffenses, the court ruled that petitioner did not meet the twinrequirements of P.D. 1740 and P.D. 1840, i.e., declaration of his trueand correct untaxed income and full payment of the tax due thereon.In this case, petitioner entered into a contract of sale purportedlyon installment, but on the same day of the consummation of thesale, he discounted the promissory note covering future installmentswith the buyer, rather than a Iender. After the filing of the criminalcomplaint, petitioner filed his tax amnesty return in Bulacan, insteadof Manila where he had his office. His tax amnesty return underP'D' 1840 did not disclose that the land sale to Ayala was in cash.Not having complied with the requisites, petitioner is not entitledto the benefits of P.D. 1740 and P.D. 1840. The mere filing of taxamnesty return thereunder does not ipso facto shield him fromimmunity against prosecution.

Tax amnesty is a general pardon to taxpayers who want to starton a clean tax slate. It also gives the Government a chance to collectuncoilected tax from tax evaders without having to go through thetedious process of a tax case. To avail of a tax amnesty granied bythe Government, and to be i.mmune from suit on its derinquencies,the taxpayer must have voluntarily disclosed his previouslyuntaxedincome and rnust have paid the corresponding tax on such previousl.yuntaxed income.

A tax amnesrLy, much like a tax exemption, is never favored. norpresumed in law and if granbed by statute, the terms of the amnesty,like that of a tax exernption, must be construed strictly against thetaxpayer and triherally in favor of the taxing authority. Hence,pet'itioner'e claim. af imr:lunity from prosecution under the sleieirl ofavaiiing of a tax an:lnesl,y is untenable.

O* ihe matter cf wl"ref,her t,ire land sale to Ayala should becc)llsidered ils a cash sale or on instailment trasis, the prevaili.ng ru.le

i

i r.il 141

l)ou t]t,!l'l'AxA'l'IoN AND TAX rlx!)MPTI0NS

Ir, ,\ IrIl,ri(:{rn law is that where an installment obligation is discounted

,rt ,r lrrrrrk or finance company, a taxable disposition results, even ift1,,. :rr.llor guarantees its payment, cOntinues to colleCt on the

r,, ,I,rIl,r,cniobligation, or handles repossession of merchandise inr,'r. r)l clefault. Sin"u Philippine income tax laws are of American,.r rl,rr, interpretations by American courts on our parallel tax laws

1,,,u,^ l,.rrsuasive effect o.t th" interpretation of these laws' Thus' by

,rilrrl(,g!, all the more would a taxable disposition result wtren the,1,',,',,,i'.ting of the promissory note is done by the seller himself'I ,1,.:rrly, the indebtedr"r. of the buyer is discharged, while the seller

,,, , 1

, , i ,Ls money for the settlement of his receivables. Logically then,

rl,,l income should be reported at the time of the actual gain. For

,rr'()nle tax purposes, income is an actual gain or an actual increase

,,1 wt:alth.,l'he court thus ruled that although the proceeds of a discounted

s,r,,rnissory note is not considered initial payment, still it must be

,,,,'luded. as taxable income in the year it was converted to cash'

wlrcn petitioner had the promissory notes covering the succeeding

rr,,rt,allment payments of the land isstred by Ayala discounted by

Ayala itself on the same day of the sale, he lost the entitlement torr.lrort the sale as a sale on installment since a taxable disposition,,,sulted and petitioner was required by law to report in his returns

ttrc income derived from the discounting. what petitioner did islrrrrtamount to an attempt to circumvent the rule on payment ofilrcorle taxes gained from the sale of the land to Ayala for the year

t1)-/6.

Lastly, on the award of damages, the Cotlrt found that the

l,rosecuti-on against respondent Larin was baseless and that said

.n,spondent sulfered urr*i"ty and humiliation due to the unfounded

,,l",arges against him. The Court thus found sufficient basis for the

,,*^id of moral and exemplary damages as well as attorney's fees'

Irgt deleted the award for actual or compensatory damages for want

of evidence on record to support the same'

E)MRCISES

1. From what sources may tax exemption emanate? May tax

exemptionsexistbyimplication?Maytaxexemptionsberevoked?(1967 Bar)

2. To encourage the production of newsprint, the Rizal Paper

Mill was accorded tix exemption privileges under R.A. 90,1 by virtue

of which no internal revenue tu*"" "directly payable" could be

LAW OI,- BASIC TAXATION IN THE PHILIPPINES

collected from it. Is it likewise exempt frorn wharfage dues? Reasons.(1972 Bar)

3' The income earned by Denny santos in 1gg1 in the unitedstates amounted to gb0,000 consisting of salaries, dividends, capitargains from real estate transactions, etc. This income is subject tou.s. federal income tax and und.er our Tax code this income is alsosubject to the preferential rates of from r% Lo B%. Is this , ";;;idouble taxation ofthe direct type? Explain briefly.

4. It is axiomatic in taxation that "tax exemptions are construedstrictissimi juris." Does this rule apply also to the granting or ir*refunds as well as questions affecting the condona-tion of unpaidtaxes? Explain your answer.

5. A certain corporation was established to manufactureprefabricated concrete slabs for export as well as local consumption.By way of tax incentive, the corporation was granted by law anexemption from all taxes "directly payable in respect to said industry',for the duration of its tax-exempt status which is five years. statewhether the tax exemption granted to the corporationincludes thefollowing: (a) payment of VAT (value-addea tax; on importedconcrete, steel and other raw materials used in the manufacture ofconcrete slabs; (b) taxes on gasoline and other fuels needed. to operateits plant; (c) motor vehicle fees for the registration of its deliverytrucks and panels; (d) community tax payable by the entity everyyear; and, (e) donor's tax on donated rand to be used as a site foranother factory building needed for expansion purposes. Thedonation is made two years after the corporation had commenced.the actual operation of its business.

6. (a) "A," after studying his tax problems, decided to withdrawhis bank deposits and to buy non-taxable or tax-exempt securities.Does "A's" act constitute tax evasion which is penalized? Explain.(1972 Bar)

(b) "B," who wishes to avoid payment of taxes assessable on thetransaction, was advised by his tax consultant to make it appear onthe deed of sale that the selling price was only?200,000 although itwas actuallyft)00,000. Is this tax avoidance of tax evasion? Explain.(1972 Bar)

t42 143

Chapter f!

TAX LAWS AND REGN.TLATIONS

NA'I'URE OF TA)( LAWS. Tax laws are civil -in o"t"l, *ot1,,,lrtrr'rrl. Hence, even during the period of enemy occupatioli (such

11,r lor. instance, during the Japanese occupation of the FhiLippinesirr Wor'ld War II, which lasted from 1942 to 1945), tax laws are, ,,r,1 rrrrrally enforced as they are deemed to be the laws of the occupied

lr,i r rlory and not those of the occupying power.

Irr t,lre case of Hilad.o u. collector of Internql Reuenue, et ol.r I ilr I l,lr il. 288), the Court did not allow the taxpayer to deduct fromlrr. l1)51 tax return a "casualty" loss incurred during the war, i.e.,

l,' l'r'otn fire, storms, shipwreck, etc., including war Iosses (now

rilIl|r. sec. 34[D][1][b], 1gg7 NIRC). Although such loss was incurred,lr, ru11 said war-it was not possible for him to make the deduction1,, r;rilse, according to him, internal revenue laws were at the time,lr(,llorceable Or in a state of suspension. The Court, however,,,, r'r'r'uled this contention and held that during the Japanese,,i i ul)irtion, the internal revenue laws of the Philippines continuedt,,lrc in force.

Neither are tax laws penal in nature. Hence, the'rule on ther,.t roactive effect of penal laws under Art.22 of the Revised Penalr ',,rle which reads: "Plnal law shall have a retroactive effect insof,ar

rr:r (.hey favor the person guilty of a felony, who is not alabitual, runinal as defined in rule 5 of Article 62 of this Code, although atrlrc time of the publication of such laws a final sentence has been

1'ronounced and the convict is serving the same'" frnds no applicationrrr tax cases. As stated in a decided case (Lorenzo u. Pasados, Jr",,'tc., 64 Phil. 353), revenue laws which impose taxes collected by

rirc&ns which are ordinarily resorted to for the collection of taxesrr rc not classed as penal laws and, therefore, cannot be givenrct,roactive effect.

Furthermore, tax laws not being penal in charactbr, the rutre inr lre constitution against the passege of er post /octo laws cannot be

,rrvoked. The constitutional prohibition against the passage of erpost facto legislation, according to the Supreme Court, applies only

i,o ""iminal

or penal matters, and not to laws which concern civilrnatters or procledings generally, or which affect or regulate civil orprivate rights @epuUtii u. Oassnvdd. de Fernandez, et ol., 99 Phil.'934;

Ex Pirte Garlond, 18 Low Ed- 366, 16 C'J'S' 889'891}

rLAW OF BASIC TAXATION IN TTIT] PHILIPPINES

Moreover, it was also held that the constitutional prohibiagainst ex post focto laws is not applicable to the collection of interorton back taxes, nor to laws which, as stated concern civil mattorlgenerally or regulate civil or private rights. The collection of interortin tax cases is not penal in nature (Central Azucarera de Don Pedrou. CTA, et ol., L-23236 and L-23254, May 31, lgif).

Increased tax rates may also be given retroactive effect so as toapply to income earned before the passage of the law authorizinjsuch increase. As in the case of interest, no constitutionaiinfringement would exist anent the ex post facto prohlbition.

INTERPRETATION OF TAX LAWS. It is a well-settled rulein taxation that a statute will not be construed as imposing a taxunless it does so clearly, expressly and unambiguously. A tax cannotbe imposed without clear and express words for that purpose.Accordingly, the provisions of a taxing act are not to be extended byimplication (Marind.uque lron Mines Agents, Inc. u, The MunicipalCouncil of the Munictpality of Hinabangan, Frouince of Samar,L-18924, June 30, 1964).

Furthermore, in errery case of doubt, tax statutes are construedmost strongly against the Government and liberally in favor of thecitizen because burdens are not to be imposed beyond what thestatutes expressly and clearly import (Collector of Internal Reuenueu. La Tondefi,o, Inc., et al., L-10431, July 31, 1g62; see alsoCommissioner of Internal Reuenue u. Fireman's Fund Insurance Co.,et a1,., L-30644, Mar. 9, 1987; Commissioner of Internal Reuenue u.Court of Appeals, et al., G.R. 115349, Apr. 18, lggT; LincolnPhilippine Life Insurance Company, Inc. u. Court of Appeals, et al.,G.R. No. 118043,Ju|y 23, 1995).

Aithough, tax burdens are not presumed, it is important toconsider, however, that tax laws are not promulgated in order toencourage tax evasion or tax avoidance. Thus, in one case, theSupreme Court said that the purpose of the Tax Code is to imposetaxes, not to enhance tax avoidance (Commissioner of InternalReuenue u" Phoenix Assurance Co., Ltd., L-I9903, May 20, l965).

In this connection, it should be noted also that like other statutes,tax laws operate prospectively whether they enact, amend or repealunless the purpose of the legislature to give retrospective effect isexpressly declared or may be implied from the language used(Philippine Educatian Co. u. Commissioner, CTA Cqse No. Z0S,Sept. 20,1965 citing Lorenzo u. Posadas, Jr., etc., supra; Commissionerof Internal Reuenue u. Filipinas Cia. De Seguros, 5S O.G. No. J, p. 460).

144 l.4t)

,I'AX I,AWS AND RI']GULAI'IONS

Ir,rr,,1' lrr ttltrop{ls to mention that since our income tax laws are

,,1 ,irr,, ,,,,,n t,rigin, interpretations by American courts on our

i,e,, ll, I t,,* lrrw-s lraru peisrasive effect (Baft'os' Jr' u' Court of'1,,1,,,,/ '. ,'t trl., (i.R- No. 102967, Feb' 10,2000)'

:iulrlt(;l,ls OF TAX LAWS. The following may be said to be

*1r,. ,,,,'rr r'(':t ()l'tax laws:

t ('orrsIitution

:, ,l,rr x qrdes such as the National Internal Revenue code, Tariff,rrrrl ()ustoms Code, and portions of the Local Government( lrrrle

.t ljlntutes like R.A. 1125 (An Act Creating the Oourt of Tax

Appeals), R.A' 7?16 (E'VAT Law), and R'A' 8424 (Tax Reforrr

Act. of 1997)

t l'residentialdecreest, l'lxecutive orders

t; (-lourt decisions

t Ilevenue regulations promulgated by the Department of

Finance

n Adnninistrative issuanees of the BIR like RevenueMernorandum Circulars, and those of the Bureau of Customs

like Customs Memorandum Orders

1) tsIR ruiingst0. L,ocal tax ordinances

I I " Tax treaties and conventions with foreign countries"

MANDAToRYANDDIBECTORYPR0VISIoNS.TheTeaTel,rovisions in existing tax laws w-hich lay down mandatory,,..1.,irements for purpoJes of the validity of certain acts performed

l,y those who are entrusted with the enforcement of revenue laws.

'lihese are known as mandatory provisions'

For instance' a mandatory provision in the Tax Code of 1977

was sec. 20? therein on the distraint of property. As a summary

.,,*edy in tax collection, the law then required that the same should

t," employed,,not earlier than three months nor later than six months

r,-o* """"ipt of the demand." It shouid be observed' however' that

onlythethree-monthperiodasabovestatedismandatoryinasmuchas the admonition that summary collection sf taxes should not be

Iater than six months from date sf dernand is only a directoryprovision. In other words, should collection be instituted beyond

rI,AW OI.' I}ASI(],I'AXAl'I0N IN'I,I I I) I)IIII,II)I,INI.]S

the six-month period provided in the law, such actio' willnecessarily result in the nullity of the collection.

There was, however, no need for the Bureau of Internal Rev.r,bo allow three months from date of receipt of assessment to errr;before summary re,redies for collection ar:e resorted to, if therbeing collected is a self-assessed tax, as in the case of the inctax, which the taxpayer reflects in his tax return, but which he failto pay on the date for payment prescribed by law. The three-morrperiod applied only when there was a previous demand or assessm()from the BIR.

Sec. 207 of the lgg' NIRC, as amended, no longer provides lo!the mandatory period of "not earlier than three (s) months,, beforgthe BIR could use the summary remedy of coilection or""y iJirqr"nt!,1I bV distraint of personal property andlor levy on

"eut prop"rty,

What is now mandated by the iaw is that upon failure of the personowing any delinquent-revenue to pay the same within the periodprescribed by law, the Commls.lorre" or his duly authorizedrepresentative shall seize and distrain personal prop"rty and/or levyreal property of the derinquent taxpayer in sufficieni qu,^.ntity t,satisfy the tax charge together with any increment thereio incidentto delinquency.

. _ Another example of a directory provision is Sec. 12 of R.A. 112b(the law creating the court of raxAppeals, effective June 16, 1gb4)which provides that cases brought blio"u the court shall be decidedwithin thirty days after submission thereof for decision (Lidd,er &Co., Inc. u. Collector of Internal Reuenue, L-g6gf, June 50, lg61).The crA is not a rnere superior ariministrative agency or tribunal;rather, it is a part of the judicial system of the ntitipirnes. It wascreated by congress as a centralized court specializing in tax cases.It is a regular court vested with excrusive appellate jurlsdiction overcases arising under the National Internal Rurru.,rru Cod.e, Tariif andCustoms Code and the Assessment Law.

As a matter of practice and principle, the supreme court willnot set aside the conclusion reached by the crA which is, by thevery nature of its function, dedicated exclusively to the study andconsideration of tax problems and has necessarily deveroped anexpertise in the subject, unless there has been an abused andimprovident exercise of authority on its party (commissioner afInternal Reuenue u. CTA, et al., G.R. No. 1041i1,-Mar. 10, lggS).

t46 147

'fAX I,AWS ANI) Itlrl(l[Jl'A'l'IONS

l'l I ltl,l(lA'l'tON REQUIREMENT' Not ail sources of tax laws

r- r , ,rrr, r'rtlt'(l itbove r"qt,i'u publication in the Official Gazette as

1r,' ,,t,,1 rrr Art'. 2 of the'cirrit'cod", which states that "(I)aws shail

ral., ,ll, r'l rtt't,u. lifieen days following the completion of their

,,,,', ,,, ,lr,rtt itt the Official Gazette unless it is otherwise provided'"

ll,rr:;, trr t,he case of Tafi'ad'a, et q'l' u' Tuuera' etc'' et ol' (G'R'

ri,, i, ri)1i,, l)ec. Zg, iggOl, it was ruled that the following require

;:r1l,lr, ,rlror) us u "orrJilio,,

for their effectivity: statutes,' including

111,, ,, ,,1 l,t:irl applicuiiorr md private laws' presidential decrees and

e ,' r r , t r u,' o rd ers promulgatea Uy tt'u Presid'ent' and administrative

lrl, rrrrrl regulations iitheir purpose is to enforce or implement

, ,, r Iurli Iltw, pursuant to a valid delegation'

l rrt.t'lrretative regulations and those which are merely internal

,, ,,,,1rr.., i.e., thos? which regulate only the personnel, of the

,,,lr,,rrr.;t,t'ati,r. usu;"y u,tJ "ot ihe public' need not be published

ilt',,1) (lonsequentfy, l" lhe BIR for instance' the following do not

, , ,,,,,,',' publlcation for purposes of effectivity: Revenue

i\1, rrlrr';rndum Orders, Revenue Memorandum Circulars' Revenue

\,lrrrrrrst.rative Orders, and BIR rulings'

I rr one case, a BIR Memopandum Circular was ruled as one which

1 , ,, r I y tbr the internal admiiristration of the BIR and not a regulation

, rrl,rrr the contemptullo,, of Sec' 245 of theTax Code and' therefore'

rri, rlr; t)o publicatron-i" tftu Official Gazette (La Suerte Cigar and

I ti:tu'ttlte F'actory, "'ol' '' CTA' et al'' L-36130' and Alhambra

l,,,lrt:;lries, lnc., et ol. u' CTA, et ol'' L'36131' jointly decided on

t, t rt t 7, 1985).

When an administrative agency renders an opinion by means of

,r i.rr.cular o, -u*orundum itLerely interprets a pre-existing law

1.r(l rro publication is required for its validity (Romualdez -u' Arca'

, t t, ' t)t al., L.2 5924, Apr. 18, 1 969, cite,J, tn La Suerte Cigar & Cigarette

l"ttt'Lory, et al. u. CTA, et al', supra)'

ln one case involving the Bureau of Customs' it was ruled that

(,rrs[oms Memorandrrri Ord"r, issued by the Commjssioner of

(.llsLomsneednotbepublishedintheofficialGazette(Yaokasinu't'rtmmission", o1Cu,[o*s, et al'' G"B' No' 84111' Dec' 22' 1989)'

Incidentally, construction by an executive branch of the

t lovernment of a particular law, although not binding o1 tfe courts'

rrrust be girr"n *"ighf u" tf'" construction comes from the branch of

tlre Government ciued upon to implement the la'w (Ibid.).

LAW OF BASIC TAXATION IN THE PHILIPPINE$

ARE TAX LAWS SPECIAL LAWS? Tax laws are specialThe Tax Code is an example of a tax law. According to onecase, the Tax Code is a special law and prevails over a gensuch as the Civil Code (Republic u. Gancayco, L-18307, Jw1964). But in case the provisions of a special law are founddeficient in a particular situation, the Civil Code shall apArt. 18, Ciuil Code).

Tax laws treat of a special subject, i.e., taxes. Hencgpublication of a Iocal taxing ordinance enacted pursuant to theLocal Tax Code (P.D. 231, as amended) which requires publionly after the approval thereof, even though the particularof the city in which the ordinance was enacted requires publibefore and after its approval, was considered validly promuIn one case, the ruling was to the effect that although theCharter of Manila speaks of ordinances in general, irresthe nature and scope thereof, Sec. 43 ofthe former Local Taxon the publication of tax ordinances should apply because theTax Code relates to ordinances levying or imposing taxes, fcharges in particular (Bagatsing, etc., et al. u. Ramirez, etc., etL-41631, Dec. 17, 1976).

In an action, instituted by the Gauernment for the recouery oferroneously refunded ta.x, which prescriptiue period will apply *six-year prescriptiue period for quasi-contracts under Art. 1146the Ciuil Code, or the three-year prescriptiue period for assessuruder Sec. 223 of the Tax Code which is a special law? The ar,sto this question is, since an action to recover an erroneously refutax is in effect an assessment of such tax, and considering thatspecial law like the Tax Code prevails over the Civil Code, aIaw, then it is the three-year period under the Tax Code thatapply (Guagua Electric Light Co., Inc. u. Collector of InternReuenue, et al., L-23611, Apr. 24, 1967).

TAX REGULATIONS. Tax regulations are promulgated bySecretary of Finance in order to implement the provisions of tTax Code. Sec. 245 (now, Sec. 244 of the 1997 Tax Code), provtthat "(t)he Secretary of Finance, upon recommendation of tCommissioner, shall promulgate ail needful rules and regulafor the effective enforcement of the provisions of this Code.Regulations must not be contrary to law for a regulation promulgaon a wrong interpretation of the Iaw or in contraventioncannot give rise to a vested right that can be invoked either by thetaxpayer or the Government (Quiazon and. Lukban, PhilippineIncome Taxation, p. 18). They must be published in the Official

148 r49

TAX LAWS AND REGULATIONS

:le rrr in e newspaper of general circuiation (B'O' 200)' They

Ire r0rtsonable (Quiazon and. Lukban, op cit') and must be withinBrrllroril,y conferued since the power to make regulations is not

ltilwrtr to legislate. under the guise of regulation, Iegislation

Irrrt,lrrr onacled (bid). Administrative regulations have the forcepl,lirr:L of law (valerio u. secretary of Agriculture q.nd Natura'l

r*,s, L-18587, APr. 23, 1963).

trYell n(Jttled is the rule that administrative regulations must be

[xrrrr,,,:y with the provisions of the law. In case of discrepancypilil the basic law and the implementing rule or regulation, the

er lrrcvails (Philippine Petroleum corp. u. Municipality of Pililla,tl, it ol., G.B. No. g0776, June 3, 1991). Rules and regulationsrl, rtol override, but must remain constant and in harmony withlaw they seek to apply. They must neither supplant nor modify

lnw (Commissioner of Internal Reuenue u' Court of Appeals'

ttl,, (;./?. No. 108358, Jan' 20, 1995; Republic u' Court of Appeals'

u,,, (j".1?. No. 109193, Feb. 1, 2000).

'l'lttts, in Phitippine Bank of Communications u' Commission'er

U{ lntt'rnal Reuenue (G.R' No. LL2O24, Jan' 28, 1999), the Supreme

flrrrrrt ruled against the relaxation ofcertain revenue regulations by

!rr,,,,,," Mernorandum Circular No. 7-85 (RMC 7-85) as ittlhr,,gflrded the 2-year prescriptive period set by iaw. Said the Court,i,l*tt,,,,, the Acting Commissioner of Internal Revenue issued RMC

'f Hlr, r:hanging the prescriptive period of two years to ten years on

t|lnt|ils of excess quarterly income tax payments, such circular created

6 1,1,u r inconsistency witir the provisions of Sec. 230 of the 1977 NIRC.

lir rr,, doing, the BiR did not simply interpret the law; rather' itl+'girlated luidelines contrary to the statute passed by Congress'"

,l,he court thus upheld the nullification of RMC 7-85 as an

"nrlrrrinistrative interpretation which is not in harmony withHt,t,. 230 of the 1977 NIRC, for being contrary to the express provision

u!'rr statute," and concluded that the same "could not be given weight

lirr t,o d.o so would in effect amend the statute"'

Moreover, the internal revenue commissioner cannot' by

turlrninistrative fiat, amend. the Iaw by making compliance therewithIrrore burdensome (Atlas Consolidated Mining and Deuelopment

{irtrporation u. Commissioner of Interrtal Reuenue, G'R' No' 133467'

Nou. 17,1999).

TAX RULINGS. Administrative rulings have been aptlyrloscribed as follows: "They are the best guess of the moment and

rrrcidentally often contain such weil-considered and sound Iaw; but

rr LAW ol,' llASl(t 'l'AXA'l'lON lN ,I,lt Ll t,llll,lt,l,lNllS

the courts have held that they do not prevent an entire change offront at any time and are merely advisory * sort of an informationservice to the taxpayer" (euiazon and. Lukban, op cit.).

POWER OF THE COMMISSIONER TO INTERPBET TAXLAws AND To DECIDE TAx CASES. sec. 4 of the 1992 NIR0specifically provides that the power to interpret the provisions ofthe Tax code and other Lax laws shall be under the excrusive andoriginal jurisdiction of the commissioner, subject to review by thosecretary of Finance. The power to decide dilputed assessments,refunds of internal revenue taxes, fees or other charges, penaltiesimposed in relation thereto or other matters arising ,rd"" ihr. coduor other laws or portions thereof administered by the Bureau ofInternal Revenue is vested in the commissioner, subject to thoexclusive appellate jurisdiction of the Court of Tax Appeals.

The opinion or ruling of the commissioner of Internal Revenue,the agency tasked with the enforcement of tax raws, is accord.ed. muchweight and even finality where there is no showing that it is patentlywrong, particularly in a case where the findings and conclu"ions ofthe internal revenue commissioner were subsJquentry affirmed bythe crA, a specialized body created for the excrusive purpose ofreviewing tax cases, and the court of Appeals (Afisco InsuranceCorp., et al. u. Court of Appeals, et al., C.A. .l/o. llZ6fS, Jan. 25,I 999).

Rulings which merely embody administrative opinions on queriessubmitted do not have the force and effect of law s (Alexand,er Howd.enctnd Co., Ltd. u. Collector of Internal Reuenue, L- l gSgZ, Apr. 14, l g6i).

NON-RETROACTIVITY oF RULINGS. Generalry, rulings arenot retroactive if they are prejudicial to the taxpayer. sec. 246 ofthe 1997 NIRC provides: "Any revocation, modification or reversalof any of the rules and regulations promulgated in accord.ance withthe preceding sections or any of the rulings or circulars promulgatedby the commissioner shall not be given retroactive apprication ifthe revocation, modification or reversal will be p""j"ai"iut to thetaxpayers, except in the following cases:

"(a) where the taxpayer deriberately misstates or omitsmaterial facts from hisreturn or any document required of him bythe Bureau of Internal Revenue;

"(b) where the facts subsequently gathered by the Bureau ofInternal Revenue are materially different from the facts on whichthe ruling is based; or

150 151

'l'AX l,nWS n Nl) ll,l,)(itlt,n'l'lONSi

(, ) Wlrcrc t,hc taxpayer acted in bad faith."lrr tlrc t::rso of Beruguet Corporatiott, u. Commissioner (CTA Case

!i,, I'ttt)'/, [ob. 14, 1996), the Court held that the retroactive',1,1,111 ;qliorr of VAT Ruling No. 8-92 will not be prejudicial to thel.r 1t,r1'('r' urrder the aforequoted exception to the general rule.

\ r';rsc which illustrates the non-retroactivity of BIR rulings is| ,,rrnt:;:;ioruer of In.ternal Reuenue u. Buruoughs Ltd., e, ol. (G.R.Il', r;(i(il-):], June 19, 1986). In that case, there was a BIR ruling1, 'r,.rl ,rrr.Ian. 21, 1980 wherein it was ruled that the 15% brancht,r,,lrl rrrnrittance tax under Sec. 25(a)(5) of the Tax Code should bel,'r ,.rl on the amount of profit actually remitted by a Philippinel1r,,rr, lr t,o its parent company abroad. However, in 1982 underli, r'r'nuc Memorandum Circular No. 8-82, the BIR reversed the priorr, r I r r r1,, rr nd held that the 15% branch profit remittance tax should bel,,r,,,rl not on the amount of profits actually remitted but on the,,r,,(,rInl, applied for remittance thereby making the basis of ttre LSyo

t,,i l;rrger than that on which said tax was computed under the,,,,1,,nirl 1980 ruling. The BIR in its subsequent ruling in 1982r, .'rrrrod that the amount applied for remittance should be the taxl,,r r,., t.hus giving rise to a bigger amount of tax.

'l'lre question here, however, is: will the reuersal ruling in 1982t, trrttlct to the braruch profit remittances made before thot yeclr or, qs

t tt tltc cas€ of Burroughs hereiru, will said ruling apply to remittances

'tt,rrle by it in 1979?

'l'he Supreme Court ruled that the payment of the branch profitr, rlril,tance having been made on Mar. 14,1979, it follows that BIRNlr,rrrorandum Circular No. 8-82 issued on Mar. L7, 1982 cannot be

1r\,(,n retroactive effect (Cf.. Bank of America NT & SA u. Court oft1,1teals, et al., G..R. No. 103092, July 21, 1994).

ln another case, the Court of Tax Appeals held that it is a settledr u lc in this jurisdiction that the administrative rulings of previous( ',r rrrmissioners are not conclusive and binding upon their successors.,\rr incumbent Commissioner may revoke, reverse or abrogate therrr'(5; s1 rulings of his predecessors in office if he becomes convincedt lrrrt a statute warrants a different construction (Antonio Tuason u.

t ,itt,gad, CTA Case No. 1398, June i6, 1965 citing Hilado u. Collector,,f lnternal Reuenue, et al., 100 Phil. 288; Collector of Internal Reuenuer,. Manila Lodge No.761 of the Beneuolent & Protectiue Order ofl,lllt,s, et q.1., 105 Phil. 953). This principle is, however, subject to theron-retroactivity rule should it appear that the ruling reversing a

lrrevious ruling of the former Commissioner is prejudicial to thelirxpayer pursuant to Sec. 246 of the Tax Code. More recently, the

rI,AW O}' I]ASIC'I'AXAl'ION IN'IIlI] PHILIPI'INITS

Supreme Court reiterated the rule on non-retroactivity of BIR rulinpguin Commissioner of Internal Reuenue u. Court of Appeals, et al. (G.ll.No. 117982, Feb.6, 1997).

It would seem however, that if a subsequent ruling revokes Iprior ruling on the ground of nullity, the same being erroneous andcontrary to existing law, there might be a basis for giving thosubsequent ruling a retroactive application.

LEGISLATM ADOPTION OF TAX RULINGS. There aroinstances where the legislature may have approved thointerpretation of tax statutes by administrative agencies throughreenactment. This is known as the the principle of legislatiueappraual of aru administratiue in terpretation through reenqctmentand may be briefly described thus: Where a statute is susceptible ofthe meaning placed upon it by a ruling of the government agencycharged with its enforcement and the Iegislature thereafter reenactsthe provisions without substantial change, such action is to someextent confirmatory that the ruling carries out the legislative purpose(Alexander Howden. and Co., Ltd. u. Collector of Internal Reuenue,supra).

It may be mentioned in this connection that Sec. 28(,{)(5) of tho1997 NIRC now clearly provides that the 75o/o tax on branch profitremittances shall be based on the total profits applied or earmarkedfor remittance without any deduction for the tax component thereof,except those activities which are registered with the PhilippineEconomic Zone Authority (PEZA). In effect, the revocatory rulingissued by the Commissioner in 1982 in the Buruoughs case regardingthe basis for the computation of the 15% branch profits remittancetax is confirmed by the legislature with the reenactment of theadrninistrative ruling in the 1997 Tax Code.

It is also settled that the reenactment of a statute substantiallyunchanged is persuasive indication of the adoption by Congress ofprior executive construction (ABS-CBN Broodca.stirlg Corp. u. CTA,et q.1., G.l?. No. 52306, Oct. 12, 1981).

DOCTRINE OF IMPLICATIONS. The doctrine of implicationsmeans that that which is plainly implied in the language of a statuteis as much a part of it as that which is expressed (City of Manila,et al. u. Gomez, etc., et al., L-37251, Aug. 31, 1981).

It was ruled that where R.4.5447 (creating the Special EducationFund, or SEF, which imposes a 1% additional tax on real property;now, found in Sec. 235, Local Government Code), in levying the L%

t52 153

,I'AX I^WS N ND ITIICUI,A'IIONS

,r,l,lrl ronul rcal estate tax provides that "the total real property tax,,l,,rll rrot, exceed a maximum of three per centunl," the cityof Manila,,rrr,l,.r.rt,s charter, can increase the existing regular rate of one and

,,rr,. lrrrlf'per cent to two per cent; so that t]ne 2o/o added to the 1%

' ,r,rrlri il(t/o, or the maximum rate allowed trnder R'A' 5447'

,I'AX TREATIES AND INTERNATIONAL AGREEMENTS'l'ir r l.rgnties or conventions also constitute an important source of

tir \ lirw. Tax treaties ordinarily comprehend iwo objectives. one is

I ,, il,,,0ir1 double taxation especially in cases where the income is taxed

r\\',,,: one by the countrywhere the income is earned (country of,,,,rr|r'r') and another by the country where the subject of baxation is

, rt lr.r'rt citizen or resiient (country of residence)' Another objective

r , I ,, r,liminate or minimize tax evasion through the adoption of the

, ,r , l r rr rtge of information scheme whereby the signatory countries to

r1,,. l,re-aty undertake to furnish each other on a mutual basis

,r,l,,rrnation on the taxable income and/or activities of any of theirrr;r I ronals or residents.

,l,he Phiiippines has entered into a number.of tax treaties, notable

,,t rvhich are those with European countries, the united states and

\lil,lAN, or the southeast Asian nations like Indonesia, singapore,

Nl rr I rrysia, and others.

lnCommissioneroflnternalReuenueu.S.C'Jahnsort'andSon,tr^', et ol. (G.R. No. iZZlOf, June 26, 1999), the Supreme Court

,'rlr;rustively expounded on the purpose and desired effects of tax

I r |rrt,iesi ,,x x x The purpose of these international agreements is to

,,.,.oncile the national fiscal legislations of the c<lntracting parties in,,rrlt:r to help the taxpayer avoid simultaneous taxation in two

,lrl'l'crent jurisdictions. More precisely, the tax conventions are

, tr; r ['ted with a view towards the elimination of international juridical,l,trybl€ taxation, which is defined as the imposition of comparable

t;rxes in two or more States on the same taxpayer in respect of the',;une subject matter and for identical periods' The apparent

.rrt,ionale ior doing away with double taxation is to encourage the

I,r.t,e flow of goods and services and the movement of capital,t ,'r:hnology urrd p""rors between countries, conditions deemed vital,,, .,reatiig robust and dynamic economies' Foreign investments wiII,,rrly thriie in a fairly predictable and reasonable international,,,vlstment climate urrd-th" protection against double taxation is

.rucial in creating such a climate'"

Incidentally,ontheratificationoftreaties'theConstitutionr.r,quires the concurring vote of at least two-thirds of all the members

t,AW ()1,. uAStc .tAxA.I't0N IN'fl 1 bt i)Hlt,l t,plNUS

of the Senate for validity and effectivity (Sec. 21, Art. Vll,1987 Constitution).Despite the aforesaid constitutional requirement, our supremocourt has ruled that r.ess formar types of i"ie"rrtioruiig"u"-"nt*

may be entered into by the chiei Executive and becom-e bindingwithout the concurrelc_e of the regislative rrai rCi*-missioner olInternal Reue,.ue u. John Gotamco & Sons., iir.,-rt-",i.", L_S10gZ,Feb. 27, tgSf). That being the case, the Host Ag""Lrrr"r,i'tf July 22,1951 between the philippines and the world ri""i;h o;;anizarion(wHo) under which th_e wHo is exempt from indirect taxes rerativeto the construction of its regional headquarters building in thoPhilippines comes within the ratter category. The court held thatsaid agreement is a varid and binding agreement even without theconcurrence of the senatg{Ibld., citing usarrn veterans AssociationInc. u. Treasurer of the philippiner,lAs phil. 1050)

CASES

REPUBLIC v. OASAN VDA. DE FERNANDEZ, ET AL.,99 PHIL. 934

FACTS: Oiimpio Fernand.ez and his wife, Angelina Oasan, had.a net worth of p8,600 on Dec. g, 1941. Duriirg th"-Juprr"r"occupation, the spouses acquired several ""ai

p"opJrties and at thetime of his death of Feb. 1i, 194b, he had a net worth oirgt,+gg.The collector of Internal Revenue assessed a war profits-tax on theestate of the deceased atF2,614.60 which his adminis;;; refusedto pay. The case was brought to the Court of Tax 6;;ir, whichsustained the validity and legality of the urr".rrri"rrtr. Theadministratrix of the estate appealed the decisio" to trr" srpremecourt. The issues raised dweli on the folrowing: iil ,rr"-q""rtion onthe constitutionality of the war profits tax with particular referenceto its retroactive nature; (2) the appiicability of said tr. t" the caseof olimpio Fernandez as the ru*L^i" imposed on individuals; and.,(3) the separate taxation of the estate of the deceasei orimpioFernandez apart from that of his wife's becausooii;;;e""andezdied before the law levying said tax was passed.

HELD: The issue of unconstitutionality of the war profits TaxLaw raised by the appellant is based o, ih" prohibition againstthe passage of ex post factolaws. This prohibition, hower-"", ,pptiu.only to criminal or penal matters, and not to laws which concerncivil matters or proceedings generally, or which urru"t o"'"ugulate

t 154 155

'I'AX I,AWS AND ITI]CULATIONS

r l'rl (,r' lrrivate rights (Ex Parte Garlan'd', 18 Law Ed' 36; 16 C'J'S',i:;,t ,\ll I ).

,l'lrc t:ontention that the deceased Olimpio Fernandez or his estate

,rlr,rrlrl rtot be responsible because he died in 1945 and was no longer

I i ,. r r r 1i w hen the law was enacted at a later date in 1946 is absolutely

,n,rl,.,rrl merit. Fernandez died immediately before the Liberation,lrrl thc actual cessation of hostilities. He profited by the war;thereilr n{) r.cason why the incident of his death should relieve his estate

I r ,,rrr l,lre tax.'l'lre properties of Olimpio Fernandez in December 1941 and those

,,,,,,,,roi during the war ur" p""tr*ed conjugal' Hence' there is no

1,,,,,,,,,1 to tax ih"* u. belonging to two individuals (husband and

w rlr') us so to be taxed independently of each other'

(.()MMISSIONERoFINTERNALREVENUEv.BURRoUGHS'l,'t't)., ET AL., G.R. NO.66653, JUNE 19' 1986

ITAGTS: Burroughs Ltd. is a foreign corporation authorized to

',rtiirge in trade or birsiness in the Phiiippines' In -1979'

it applied

,u,il, th" Central Bank for an authority to remit profits to its parent

, rrlrf)Brl1l abroad. Pursuant to Sec. 24(bx2xiii) (now, Sec' 28[A][5]ofrt,,' tgdT Tax Cod.e), it remitted the amount of F6'499'999'30

, ,,rrrputed, as follows:

Amount applied for remittance .""""" """"' """" fl'64?'058'00

Deduct: Branch profit remittance tax of l5% """""' 1'147'058'70

Net amount actually remitted...."" f6'499'999'30

Consequently, the company filed a claim for refund of

l, I 72,058.81, as overpaid branch profit remittance tax, claiming that

tlrc 157o tax should be based not on P7,647'058'00' the amount

,rpplied for remittance, but onP6,499,999'30, or the amount actually

rcrnitted, computed as follows:

Branch profit remittance tax paid at t|o/o of ?1 '647' 058 00 " fl'147'058'70

Less: Branch profit remittance tax as computed(t5% of P6,499'999.30) ..'.'."' """""' 974,999.89

F 172,058.81Total Amount Refundable

The issue raised in the case is: Should the 15% branch profit

lemittance tax in question be computed on the amount of profit

rt,AW OI.'BASIC TAXATION tN THE pHILtpl,lNIJS

applied to be remitted abroad (i.e., the sum ofp7,64Z,0bg.00), or thoprofit actually remitted in the amount of ?6,499,9g9.80?

HELD: The rb% branch profit tax should be based on theamount of profit actually remitted. It should be noted that in a rulingdated Jan. 21,1980, the BIR ruled that the 1b% remittance tax is onthe profit actually remitted abroad and not on the totai branch profitsout of which the remittance is to be made. This ruling was, however,subsequently revoked in Mernorandum circular No. s-az *hi"h Lr"ldthat the 15% branch profit remittance tax is imposed. and collectedat source so that necessarily the tax base should be the amountactually applied by the branch as profit to be remitted abroad.

But even inspite of this subsequent ruling, the applicable rulingis that which was issued on Jan. 21, 1gB0 o., a."or,,.rt of thenon-retroactivity rule in sec. B27 (now, sec. 246) of the Tax code,which provides that the reversal rulings of the commissioner arenot to be given retroactive effect ifprejudicial to the taxpayer, exceptin any of the three exceptions mentioned. therein. The payment ofthe overpaid remittance tax having been made on Mar. r4-, lg7g, itfollows that Memorandum circular No. 8-g2, dated Mar. 12, 19g2,cannot be given any retroactive effect.

BANK OF AMERtrCA v. COURT OF APPEALS, ET AL., c.R.NOS. 103092 and 10310G, JULY ZL,tgg4

FACTS: Petitioner, a foreign corporation licensed to engage inbusiness in the Philippines, paid the lbo/o branch remittance tax onprofits from its regular banking dnd foreign currency unit operationstotaling P1,984,250"97 based on net profits after income tax withoutdeducting the amount corresponding to the 1b% tax. It later filed aclairn for refund with the BIR of that portion corresponding to the15% branch profit remittance tax arguing that said ts% tai shouldbe assessed on the amount actually remitted abroad, persec. 2aft)(2)(ii), NIRC. The commissioner of Internal Revenuecontends otherwise, holding that the 1b% remittance tax should beinclusive of the st:.m deemed remitted.

The CTA upheld petitioner bank's claim for refund, but saiddecision was reversed by the Court ofAppeals.

HELD: Not much reliance can be placed on the ruling inBurroughs Limited u. commissioner of Iruternal Reuenue, et al. (G.R.No. 66653, June 19, 1986) for the conclusion reached in that casewas grounded more on non-retroactivity of rulings.

156 t57

'l'Ax t,nws n ND ltlrciul,A'l'loNS

l,lr,, l:rx ltaid or withheld in case of ad ualorem taxes is nott, ,lrr, t,.,1 l'rlrrr l,he tax base because the law, in defining the tax base

,,,,,1 ur 1r'ovitl ing for tax withholding, clearly speils it out' However'

rl,, ,( r;i nrrt,lring-in Sec.24(bx2)(ii), NIRC (now, Sec' 28[A][5]' 1997

,; t t;t ,^ ), which indicates that the lsYotaxon branch profit remittance

r,,,,rr llr0 l,oLaI profit to be remitted abroad' In the 15% remittancer,r, llr,. lrrw splcifies its own tax base to be on the "profit remitted,rl,r,,,r,l " 'l'here is absolutely nothing equivocal or uncertain about

rl,, l;rnllrilge of the provision' The tax is imposed on the amount,, ,,1 ,,1,,.r,aJ, and the law then in force calls for nothing further.

'lV /J.: Sec" 28[A][5], 1997 NIRC, on branch profit remittancel,r r now llrOvideS -

"15) I'ax on. Branch Profits Remittqnces'- Any profitr,.rrritted by a branch to its head office shall be subject to aI ;r x of fifteen percent (15%) which shall be based on the total

1,r'o['its applied or earmarked for remittance without any,1,'rluction for the tax component thereof (except those

,rt'tivities which are registered with the Philippine Economic

Z,,ne Authority). The tax shall be collected and paid in the

:i;une manner as provided in Sections 57 and 58 of this Code

\xx""

t ()MMISSIONER OF INTERNAL REVENUE v" COURT OF

\ l't,trALS, ET AL., G.R. NO. 108358, JAN. 20, 1995

ttAcTs: on Aug" 22,1986, E.O. 41 was promulgated declaring a

,,rr, l,ime tax amnlsty on unpaid income taxes, and was later,,,,r,,rrded to include estate and donor's taxes as weII as taxes on

l,rr:rrness for taxable years 1981 to 1985'

l,rivate respondent R.O.H. Auto Products, Philippines, Inc.

,rVrril€d of the amnesty in october and November 1986 by filing its,\rrrrresty Tax Returns and paying the corresponding amnesty tax

,1,r,,. pritr to such availment, the Commissioner of Internal Revenue

, r r ir ;cSS€d. private respondent its deficiency income and business taxes

l,,r'fiscal years endld Sept.30, 1981 and Sept' 30, 1982' Private

r,'r;pondent responded that since it availed of the tax amnesty' the

lr.ll,er assessments shouid accordingly be withdrawn' Thet lornmissioner denied the request on the ground that Rev' Memo()rder No.4-8?, dated Feb,9, 1987, implementing E'O' 41' had

,.,rnstrued the amnesty Coverage to include only assessments issued

l,y t,he BIR after the promulgation of E'o. 41 and not to assessments

rLAW OF BASIC TAXATION IN THE PHILIPPINES

theretofore made. Both the crA and the court of Appeals ruled infavor of the taxpayer.

HELD: while the authority of the secretary of Finance, inconj,nction with the commissioner of Internal Revenue, topromulgate all needful rules and regulations for the effectivoenforcement of internal revenue raws cannot be controverted andsuch rules and regulations as well as administrative opinions andrulings deserve respect by the courts, however, all such issuanceumust not override, but must remain consistent and in harmony with,the law they seek to apply and imprement. Administrative rules andregulations are intended to carry out, neither to supplant nor tomodify, the law.

E.o. 41 is explicit and requires hardly anything beyond a sirnpleapplication of its provisions. E.o. 41, in its exclusionary clausls,did not include the 1981 to 19gb tax liabilities already assessed.said executive order has been designed to be in the nature of ageneral grant of tax amnesty subject only to cases specificallyexcepted by it.

COMMISSIONER OF INTERNAL REVENUE v. COURT OFAPPEALS, ET AL., G.R. NO. 119761, AUG. 29, 1996

FACTS: The Philippine patent office issued to privaterespondent Fortune Tobacco corporation (Fortune Tobacco) separatecertificates of trademark registration for ,,Champion,,, *Hope,"

and."More" cigarettes. It was the position of the commissioner of internalRevenue that said cigarette brands should be classified as foreignbrands since they were listed in the world robacco Directory asbelonging to foreign companies. Fortune Tobacco changed the nameof "Hope" to "Hope Luxury," and ,,More,' to *More premlum,, therebyremoving them from the foreign brand category.

R.A. 7654, amending Sec. 142(c)(1), NIRC, was enacted andbecame effective on JuIy B, 1gg3. A month later, RevenueMemorandum circular No. BZ-SB (RMC Bz-98) was issued by theBIR categorizing "Hope," "More,,, and ,.Champion', as locallymanufactured cigarettes bearing a foreign brand subject to blo/o ad.ualorem tax. A copy of EMC 87-93 was sent by fax to Fortune Tobaccowithout being addressed to anyone in particular. on July 15, 1g98,a certified xerox copy of RMC 37-gB was received by Fortune Tobacco.

On July 19, 1993, Fortune Tobacco wrote the BIR appellatedivision for a review, reconsideration and recall of RMC gz-93, andon the following day, the BIR assessed Fortune Tobacco an

158 159

,IAX I,AWS AND R!]GULATIONS

,*tl t'atlttt'(tn tax deficiency of P9,598,334.

l",,r.l rrno'I'obacco filed a petition for review with the CTA on.\rrs. .1, l1)94. The CTA ruled in favor of Fortune Tobacco and the,1r,, r,rrorr 1[the tax court was affirmed by respondent Court of Appeals'

t i ti L I): The Supreme Court sustained the ruling of the appe trlate

rrrrrl lrrx ctlurts.'l'lrcrc is no doubt that the BIR has wide and ample authority in

tlr |irirrance of rulings for the effective implementation of the

t,rr'\'r;rons of the NIRC. Like any government agency, however, theL,,lrtrssioner of Internal Revenue may not disregard the legal1r.r1urr.('11e1ts and applicable principles in the exercise of its,1,r,',,r lcgislative powers.

i\ reading of RMC 37-93, particularly considering the, r , r ulstances under which it has been issued, shows that the circular,.ilrilot be viewed simply as a corrective measure (revoking in the

t,,o(.(,ss the previous holdings of past Commissioners) or merely as

,,,rr:;lruing Sec. 142(c)(t), NIRC (now, See. 145, 1997 NIRC)' as

rr rrrIrrderC., but has, in fact and most importantly, been made in order1,, pltce "Hope Luxury," "Premium More" and "Champion" wit'hinr lr,. ,:lassification of locaIIy manufactured cigarettes bearing foreignt, r rr rrtls and to thereby have thern covered by R.A. 7654. specifically,tlr,. 11916r law would have its amendatory provisions applied to locally,,, rr rrnfactured cigarettes which at the time of its effectiuily were not,,, t'lassified as bearing foreign brands. Prior to the issuance of the,l,rlstioned circular, "Hope Luxury," "Premium More," and"r ,lrarnpion" cigarettes were in the category of Iocally manufactured, ,li,rrettes nol bearing foreign brand subject to 459/o ad uy.lorem tax.ilr.rrc€, without RMC 37-93, the enactment of R.A. 7654 would havelr:rtl no new tax rate consequence on private respondent's products.

l,iviclently, in order to place "Hope Luxury," "Premium More," and( hampion" cigarettes within the scope of the amendatory 1aw and,rbject them to an increased tax rate, the disputed RMC 37-93 had

(0 be issued. In so doing, the BIR not simply interpreted the law;vt,rily, it legislated. under its quasi-legislative authority. The due

,,lrservance of the requirements of notice, hearing and publicationr;hould not have been then ignored.

RMC 37-93 likewise infringed on uniformity of taxation.scc. 28(2), Art. VI of the 1987 constitution mandates taxation to be

rr niform and equitable. Thus, all taxable articles or kinds of property,r{, the same class must be taxed at the same rate and the tax mustoperate with the same force and effect where the subject may be

lbund.

r I,AW OI.' t]ASIC'I'AXA'J'ION IN THI' PHILII'I'INES

RMC 37-93 apparently applies only to "Hope Luxury," "PremiumMore," and "Champion" cigarettes, and thus suffers from lack ofuniformity of taxation. The CTA, in its decision, noted that othercigarettes bearing foreign brands have not been similarly includedwithin the scope of the circular. The hastily promulgated RMC37-93 has fallen short of a valid and effective administrative issuance.

COMMISSIONER OF INTERNAL BEVENUE v. COURT OFAPPEALS, ET AL., G.R. NO. 1t7982, FEB. 6, 1997

FACTS: The present dispute arose from the discrepancy in thetaxable base on which the excise tax is to apply on account of twoincongruous BIR rulings: (1) BIR Ruling 473-88, dated Oct. 4, 1988,rvhich exclurled the VAT from the tax base in computing the 15%excise tax due, purported.Ly in accordance with Sec. 127 of the TaxCode, as amended by E.C. 273; and, (2) BIR Ruling 017-91, datedFeb" 1l-, 1991, which included back the VAT in computing the taxbase for purposes of the 15% ad ualorem tax, pursuant to Sec. 742 of.

the T'ax Code and thereby revoking BIR Ruling 473-88.

Private respondent Alhambra Industries, Inc. (Alhambra), adornestic corporation engaged in the manufacture and sale of cigarand cigarette products received on May 7, 1991 a letter datedApr. 26, 1991 from the Cornmissioner of Internal Revenue assessinga deficiency ad ualorem tax of P488,396.62, inclusive of incrernentsc,n rermovals of cigarette products from place of production for theperiod from Nov. 2, 1990 to Jan. 22,1991,. Alhambra protested theassessment and requested that the same be withdrawn and cancelled.The Llommissioner denied the protest and requested payment of therevised arnount of P520,835.29. Without waiting for action on itsreqriest for reconsideration, Alhambra filed a petition for review withthe C'I'A orr June 19, 1991, even as petitioner, in the meanwhile,denied its request for reconsideration on June 21, 1991. Privateresporrdent then paid under protest the disputed ad ualorern tax of1520,835.29.

For the period from Nov. 2, 1990 to Jan. 21, 1991, privaterespondent Alhambra paid F3,905,348.85 ad ualorem tax, applyingSec. 127(b), NIRC, as interpreted by BIR Ruling 473-88. Fetitionerthen sought to apply BIR Ruling 01?-91 retroactively to Alhambra'sremovals of cigarettes for said period, alleging bad faith on the partof Aihambra, which is an exception to the rule on non-retroactivityof BIR rulings.

The CTA ruled in t'avor of private respondent Alhambra andordered the Commissioner of Internal Revenue to refund F520,835.29

160 161

'l'Ax I,AWS ANI) ll,lt(itJl,A'l'l(JNS

r r,;rr.rrr,rrt.ing erroneously paid ad uqlorem tax. The Court of Appeals,r tt rr rrrr,rl t,hc CTA's decision holding that there can be no retroactive,,1,1,1rr':rl.ion of BIR Ruling 017-91 because Alhambra did not act inl,,r,l l:rrt,lt.

Itt,)t,l): The deficiency tax assessment issued by petitionerirt'inn:il, private respondent is without legal basis because of thel,r,,lrrlriLion under Sec. 246 of the Tax Code against the retroactive,r1,1,111'11[,is11 of the revocation of BIR rulings in the absence of badl,rrl lr orr the part of private respondent.

'l'lrt. correct computation of the excise tax on cigarettes in the, i, ,t ;rt bar is sufficientiy addressed by BIR Ruling 017-91 dated1,, l, I l, 1991 which'revoked BIR Ruling 473-88 dated Ott.4, 1988.

Wcll entrenched is the rule that rulings, circulars, rules andr ,.1, r i lrr bions promulgated by the Commissioner of Internal Revenue,r,,rrlrl have no retroactive application if to so apply them would be

1,,, lrrrlicial to the taxpayer. Without doubt, private respondent would1,, lrrt..1udiced by the retroactive appiication of the revocation as it'.,,rrlrl be assessed deficiency excise tax.

As to whether private respondent falls under the third exception,rrr,lr.r Sec.246, i.e., taxpayer who acted in bad faith, there is no, \'r(l(,nce that Alhambra's implementation of the computationrr .rrrrlated by BIR Ruling 473-88 is ill-motivated or attended with a

,l lronest purpose. Neither does the failure of private respondent to,,,,,,rrrlt petiLioner rmply bad faith on the part of the former.

t ()MMISSIONER OF INTERNAL REVENUE v. COURT OF,\l,|,EALS, ET AL., G.R. NO. 115349, APB. 18, 1997

ttACTS: Private respondent Ateneo de Manila Universityr ,\lcneo), a non-stock, non-profit educational institution, through one,,1 rt,s auxiliary units, the Institute of Philippine Culture (IPC),, ,'n(lucts researches and studies ofsocial organizations and culturalr;rltres. The IPC occasionally accepts sponsorships for its research,r, tivities from international organizations, private foundations andI'.vcrnment agencies.

Private respondent Ateneo was assessed on June 3, 1983 therrrrrount of P174,043.97 for alleged deficiency contractor's tax, and,,lr .Iune 27, L983, the amount of P1,141,837 for alleged deficiency,r(:ome tax for the fiscal year ending 1978. Ateneo denied said taxlr;rbilities in a letter-protest and contested the validity of the,r;sessments. The Commissioner of Internal Revenue rendered a

r- l,nw ot' IIASIC .t.AXA.l'l()N IN 1'1il, l,Hlt,l t,t,tNI,)S

decision canceling the deficiency income tax but modiiying t,lassessment for deficiencl, contractor,s tax to FlgB,+Zf,fiunsatisfied, Ateneo requested for reconsideration of the modifiassessment, and at the same time filed a petition for review withe crA. while the petition was pending therein, the commrssiorrissued a final decision on Aug. B, lggg reducing the deficicontractor's tax to P46,b16.41, exciusive of surcharges and. inter

The crA set aside the commissioner's decision and canceled thlassessment. The court of Appeals likewise disagreed with theCommissioner and affirmed the CTA's ruling.

Petitioner contends that private respondent Ateneo is anindependent contractor subject to the B%o tax levied under sec.221t,NIRC. Petitioner stated that since the term "independ.ent contractor,tis not specifically defined, any person who renders physical or mentalservice for a fee is considered an independent contractor liable forthe 3o/o contractor's tax, and Ateneo has the burden of proof to showits exemption from the coverage of the law.

HELD: Petitioner commissioner of Internal Revenue erred inapplying the principles of tax exemption without first applying thewell settled doctrine of strict interpretation in the imposition oftaxes. It is obviously both illogical and impractical to deteimine whoare exempted without first determining who are covered by theaforesaid provision. The commissioner should have d.eterminedfirst if private respondent was covered by Sec. 20b, applying therule of strict interpretation of laws imposing taxes and otirer"burdenson the populace, before asking Ateneo to prove its exemptiontherefrom. The court takes this occasion to reiterate the hornbookdoctrine in the interpretation of tax laws that ,,(a) statute will notbe construed as imposing a tax unress it does so'crearry, expressryand unambiguously. x x x (A) tqx cqnnot be imposed wiihout ctearand express words for that purpose. Accordingly, the general rule ofrequiring udherence to the letter in construing statutis applies withpeculiar strictness to tax loros and the provisions of a taxing act areruot to 6e extended by implication." parenthetically, in arisweringthe question of who is subject to tax statutes, it is basic that ,,in caseof doubt, such statutes are to be construed most strongly againstthe Government and in favor of the subjects or citizeis becauseburdens are not to be imposed nor presumed to be imposed beyondwhat the statutes expressly and. clearly import.',

To fall under its coverage, sec. 20b of the rg77 NIRC requiresthat the independent contractor be engaged in the business of slllingits services. Hence, to impose the three percent contractor,s tax on

162 163

1'AX I,NWS AND RIIGULA'I'IONS

''.trt.rrr..,r lrrsti[ute of Philippine Culture, it should be sufficientlyg,,,,,,,,, llrrrt, the private resptndent is indeed selling its services for

u 1,., ,,, 1,,,."rit of an independent business' And it is only after

t:*t.i,t,, ,:,'spondent has been found cleariy to be subject to the

i,*,,,,,,,,,,,,'nf S"". 205 that the question of exemption therefrom

.*,,,r1,1 ,,rrse. Only after such coverage is shown does the ru]'e of

i,r'1lr u('l,ron-that tax exemptions are to be strictly construed

riE,irr',1 t,he taxpayer-come into play, contrary to petitioner's

;li,rlltoll.'l'lr.r'c is no evid'ence that private respondent Ateneo's IPC ever

=rr I r I r I : r :;1lrvices for a fee to anyone or was eyer engaged in a business

11,,,,t lrom and independenily of the academic purposes of the

I ll r v, r's it.Y.,|.1r.. l'unds received by Ateneo,s IPC are technical}y not a fee.

l11r.1' rrril1,, however, be considered as gifts or donations to an

erlrrr rr I r,lnal institution which are tax exempt, pursuant tO Sec' 123'

llll{('(rrow, Sec. 101, 1997 NIRC).

I'III I,I PPINE BANK OF COMMUNICATIONS V'( (INIMISSIONER OF INTERNAL REVENUE' ET AL'' G'R'r't( ! I12024, JAN. 28, 1999

ItAcTS: Petitioner Philippine Bank of communications (PBCom)

trl, rl rt,s quarterly .rrpor"iu income tax returns for the first and

'rr.r,n(l quarters of fgSS, reported profits and settled the tax due

rl,, r (,()n of P5,0t6,954 by applying its tax credit memos'

llowever, PBCom suffered losses and when it filed its annual

sslrrrfile tax return for 1985, it declared a net loss of'fl1'317'228'rlr,.rtby showing no income tax liability. It also reported a net loss

,'t t'14;129,602 ior 1986 and thus declared no tax payable for that

i,, ,rr. During those 2 years, however, PBCom earned rental income

tr,rr. its leased prop"rii", with the lessees withholding and remitting

t,, t lre BIE the corresponding withholding creditable taxes'

On Aug. 7, \g87, PBCom requested the BIR for a tax credit of

r1,,016,954 representing the overpayment of taxes for the first and

,,,.,:,,,rd'quarters of 1985: On July 25, 1988, PBCom filed a claim for

r,.t'und oicreditable taxes withheld by its lessees from rental income

,,11n282,7g5.50andmg4,077.69for1985and1986'respectively'l','rrding investigation, PBCom filed a petition for review on

Nov. 18, 1988 with the CTA.

The cTA rendered a decision on May 20, 1993 denying PBCom',s

r.r;uest for tax refund or credit totaling ?5,299'749'95 for 1985 on

r-LAW O!'tsASIC TAXATION IN THE PTIII,IPPINES

the ground that it was filed beyond the 2-year prescriptive peIt also denied PBCom's claim for refund for 1986 amountingfl,34,077.99 on the assumption that it was automatically credirby PBCom against its tax assessment in the succeed.ing year. Imotion for reconsideration having been denied, pBCom filod

i

petition for review with the Court of Appeals which,affirmed the CTA's decision.

PBCom averred that the Court of Appeals erred. in denyingplea for tax refund or tax credit on the ground of prescriptidespite its reliance on Revenue Memorandum Circular No. T(RMC 7-85), dated Apr. 1, 1g8b, changing the prescriptive pfrom 2 years to 10 years. Said circular states that overpaid intaxes are not covered by the 2-year prescriptive period underTax Code and that taxpayers may claim refund or tax credit forexcess quarterly income tax from the BIR within 10 years pursto Art. 1144, Civil Code. Petitioner further argued thatGovernment is barred from asserting a position inconsistent wione previously taken and that BIR circulars or rulings haveretroactive effect when the same would result in injusticetaxpayers. Contrarily, the Commissioner of Internal Revenue insion the reckoning of the 2-year prescriptive period from the datefiling the final adjusted income tax return.

HELD: After a review of the records and applicabjurisprudence, the supreme court held that the relaxation of reven,regulations by RMC 7-85 is not warranted since it disregardsZ-year prescriptive period set by law.

Claims for refund or tax credit should be made within the tifixed by Iaw because the BIR, being an administrative body eto collect taxes, its functions should not be unduly delayedhampered by incidental matters.

Sec. 230, NIRC (now, Sec. 229, 1ggf NIRC) which providesthe prescriptive period for filing a court proceeding for theoftax erroneously or illegally collected, states that the taxpayer nfile a claim for refund or credit with the commissioner of InterRevenue within 2 years after payment of the tax before any suitthe CTA is commenced. The 2-year prescriptive period shouldcomputed from the time of filing the adjustment return andpayment of the tax for the year.

When the Acting Commissioner of Internal Revenue issued R7-85 changing the prescriptive period of2 years to 10 years on clairof excess quarterly income tax payments, such circular created

164 165

'l'r\X LAWS ANll ltllcUl'A'l'lONS

lr rr r r nr'onsistency with the provision of Sec' 230 of the 19?7 NIRC'

11, ,,, rl,rrrg, tne gtnJid not simply interpret the-law; rather' itl"f: r ,lrr t ,'tl guidelines contrary to the statute passed by Congress'

l(,'v.rttte memorandum circulars are considered administrative

*ril.rtirr(irr the sense of more specific and less general interpretations

,,1 t,,,, l,rws) which are issued from time to time by the Commissioner

,,1 lrrt,,r.rrul Revenue. It is widely accepted that the interpretation

1ilr,, 'l u[)on a statute by the executil'e officers' whose duty is to

-,,1,,,,,' ii,, is entitled to great respect by the courts' Nevertheless'

=,,, t, , ,, t,,.pretation i, ,tot".o"tusive and will be ignored if judicially

I*rrrrrl t,o be erroneous' Thus, courts will not countenance

e,lrrr r rr rstrative iss.tarrces that override' instead of remaining

rrrrr',r'rl*Dt and in frui*o"y with, the law they seek to apply and

irrrl,llttttltlL.

Irr l)eople u. Lim (108 PhiI' 1091)' it was held that rules and

r,,t,rrl:rlions issued by administrative officiais to implement a law

, ,,',,,',,1 go beyond the terms and provisions of the latter'

I.'rrrrdamentalistherulethattheStatecannotbeputinestoppel1,, llr,' mistakes o, urro,. of its officials and agents' RMC 7 85 issued

| , ' r t ,, ' Acting Commissioner of Internal Revenue is an administrative

,,,t,',1,.etatiin which is not in harmony with Sec' 230 of the 1977

rlri(l :rnd should be nullified for being contrary !q the.express

t,r,'\'rrion of a statute. Hence, his interpretation could not be given

.-, ,,'l't. for to do so would in effect amend the statute'

,\rlrninistrative decisions do not enjoy the level of recognition as

1,, r r r 1 i part rrf the legal system of the country given to judicial decisions

,,,,1,'r-Art. 8 of the Civll Code' A memorandum circular of a bureau

1,, ',,1 could not operate to vest a taxpayer with a shield against

r,r,lr, i:rl action. There are no vested rights to speak of respecting a

,i ,,.I-t construction-of the law by the administrative officials and

'rrr lr wrong interpretation could not place the Government in

,. ,t,rppeI to "orr"a1--o"

o"""'ule ttre same' Moreover' the

,,,,,, .,,trou.tivity of rulings by the Commissioner of Internal Revenue

,, rr,,t, applicabll in thisiase because the nullity of RMC 7-85 was

,1,,lrrred by respondent courts and not by the Commissioner of

lrrl,'r'rr&l Revenue' A .t^l* for refund is in the nature of a claim for

, ,,,"rnption and should be construed strlclissimi juris against the

I :r ", lrir|€LScc. 69 of the 1977 NiRC (now, Sec' 76 of the 1997 NIRC) provides

tlr;r( uny excess "i tf," 1"t"i quarterly payments over the actual

r, {rrr)e tax computed in the adjustment or finai corporate income

r , ,: return , snitt either (a) be refundeti to the corporation' or

LAW OT BASIC TAXATION IN THE PHILIPPINIIS

(b) may be credited against the estimated quarterly incomeliabilities for the quarters ofthe succeeding taxable year.

The corporation must signify in its annual corporate adjusreturn (by marking the option box provided in the BIR form)intention, whether to request for a refund or to claim an automltax credit for the succeeding taxable year. To ease the administrof tax collection, these remedies are in the alternative, and the chof one precludes the other. ,

COMMISSIONER OF INTERNAL REVENUE v. S.C. JOAND SON, INC., ET AL., G.R. NO. L27105, JUNE, 25, 1999,i

HELD: The purpose of these international agreementsreconcile the national fiscal legislations ofthe contracting partiorder to help the taxpayer avoid simultaneous taxation indifferent jurisdictions. More precisely, the tax conventionsdrafted with a view towards the elimination of international iurid,ouble taxation, which is defined as the imposition of comtaxes in two or more states on the same taxpayer in respect ofsame subject matter and for identical periods. The apparent ratifor doing away with double taxation is to encourage the freegoods and services and the movement of capital, technologypersons between countries, conditions deemed vital in creatingand dynamic economies. Foreign investments will only thrivefairly predictable and reasonable international investment cliand the protection against double taxation is crucial in creating sa climate.

Double taxation usually takes place when a person is aof a contracting state and derives income from, or owns capitalthe other contracting state and both states impose taxes onincome or capital. In order to eliminate double taxation, a tax treiresorts to several methods. First, it sets out the respective righbax of the state of source or situs and of the state of residenceregard to certain classes of income or capital. In some cases,exclusive right to tax is conferred on one of the contracting stathowever, for other items of income or capital, both states are giVithe right to tax, although the amount of tax that may be imposed.ithe state of source is limited.

The second method for the elimination of double taxation apwhenever the state of source is given a ful} or lirnited right totogether with the state of resi.dence. In this case, the treaties mit incumbent upon the state of residence to allow relief in order

166 L67

TAX LAWS AND RAGULATIONS

flnlrl rlouble taxation. There are two methods of relief-theforlrrlrl,ion method and the credit method. In the exemption method,

p lrrr,:ome or capital which is taxable in the state of source or situs

A*errrrpted in the state of residence, although in some instances itty 6, i,aken into account in determining the rate of tax applicablet,ho t,+rxpayer's remaining income or capital' On the other hand, in

rrriltlit method, although the income or capital which is taxed inrl,rrl,cl of source is still taxable in the state of residence, the tax

lrl irr the former is credited against the tax levied in the latter.rs hllsic difference between the two methods is that in the

Slpnrtlt,ion method, the focus is on the income or capital itself'lEprnrts the credit method focuses upon the tax.

In negotiating tax.treaties, the underiying rationale forreducing

lhp trrx ,ut" ir that the Philippines will give up a part of the tax in

ihe, *,xpectation that the tax given up for this particular investment

it rrol"taxed by the other country. Thus, the petitioner correctly

Oplrr,,d that the phrase "royalties paid under similar circumstanies"

Il tlr,, most favored nation clause of the US-RP Tax TreatyIlpr,r,usarily contemplated "circumstances that are tax-reIated."

'l,he ultimate reason for avoiding double taxation is to encourage

frlrrign investors to invest in the Philippines-a crucial economic

g,,u I ibr developing countries. The goal of double taxation conventions=Wilrrld

be thwarted if such treaties did not provide for effective

Iutsilsures to minimize, if not completely eliminate, the tax burden

lar,l rrpon the income or capital of the investor. Thus, if the rates of

i n x , rL lowered by the state of source, in this case, by the Philippines,

lltt,rc should be a concomitant commitment on the part of the state

1l' rgsidence to grant some form of tax relief, whether this be in the

fsnrr of a tax credit or exemption. Otherwise, the tax which could

Iravo been collected by the Philippine Government will simply be

r,llloc[ed by another state, defeating the object of the tax treaty since

l,hr tax burden imposed upon the investor would remain unrelieved.

!l' l,he state of residence does not grant some form of tax relief to the

Itlvostor, no benefit would redound to the Philippines, i.e" increased

Irrvcstment resulting from a favorable tax regime, should it impose

a l0wer tax rate on the royalty earnings of the investor, and it would

lu, better to impose the regular rate rather than lose much-needed

t(!venues to another countrY.

At the same time, the intention behind the adoption of the

ltrovision on "relief from double taxation" in the two tax treaties inilqcstion should be consid.ered in light of the purpose behind the

rrrost favored nation clause.

F

The purpose of a rnost favored nation clause is to grant to thtcontracting party treatment not less favorable than that which halbeen or may be granted to the "most favored" among other countriThe most favored nation clause is intended to establish the princiof equality of international treatment by providing that the citizontor subjects of the contracting nations may enjoy the privilegoraccorded by either party to bhose of the most favored nation. Thcessence of the principle is to aliow the taxpayer in one state to availof more liberal provisions granted in another tax treaty to which thocountry of residence of such taxpayer is also a party provided thatthe subject matter of taxation, in this case royalty income, is thosame as that in the tax treaty under which the taxpayer is liabk:,Both Article 18 of the Rp-us rax Treaty and Article ri(zxu) of thoRP-west Germany Tax Treaty speak of tax on royalties for the ussof trademark, patent and technology. The entitlement of the 10%rate by u's. firms despite the absence of a matching credit (2oo/o fotroyalties) would derogate from the design behind the most favorednation clause to grant equality of international treatment since thetax burden laid upon the income of the investor is not the same inthe two countries. The similarity in the circumstances of paymentof taxes is a condition for the enjoyment of the most favor"d nationtreatment precisely to underscore the need for equality of treatment.

EXERCISES

1. During the period of the deficiency but prior to assessment,a law was passed providing that interest would be collectible on theamount of income tax not paid. Accordingly, the commissioner ofInternal Revenue included such amount in the assessment made.The taxpayer refused, contending that to require him to pay suchinterest would be to violate the prohibition agains t ex post fictolaws.Decide the case with reasons. (1g72 Bar)

2. where a doubt or ambiguity arises in connection with theimposition of a tax under a particular taxing state, what rule ofconstruction is applied? Discuss.

3. It is oftentimes said that our tax laws, like the law on incometax under our National Internal Revenue code, are neither politicalnor penal but they are actually civil, in nature. Discuss theimportance of this principle especially as it relates to the deductibilityof losses during wartime as the imposition of war profits taxes onincreases in net worth during the war.

LAW O!'BASIC TAXATION IN'IIHE PHII,IPPINI'S

168 169

.I'AX I,AWS AND R!]GULATIONS

'I Assume for example that in 1986, in response to a legal query

1,,,'',.,1 lr.y a pawnshop owner, the BIR ruled that pawnshops are notl, rr,lrrr11 investors subject to the 5o/o tax under Sec. 116 of the Taxr',,r1r.. l'ursuant to this ruling, Squaredeal Pawnshop, Inc. did notI,i, \' ir ny lending investors tax on its business. However, in 1988 thell I lt rt.versed this ruling and declared that pawnshop operators are(rrr:rlrle . May the BIR, therefore, in consonance with this latterr rrlrrrg, assess Squaredeal Pawnshop, Inc. for back taxes,,,r r',.sponding to the period prior to the 1988 ruling? Give yourr (':lliol1s,

fr. Assume, however, that in the problem above, no ruling onr lr,. t axability or non-taxability of pawnshop owners was ever issued,rl, 1,r)u think the BIR could retroactively apply the 1988 ruling and,;r::(,ss pawnshop owners accordingly? Reasons'