CIR v

A. General Principles

CONCEPT, NATURE AND CHARACTERISTICS OF TAXATION AND TAXES

CIR v. Cebu Portland Cement Co. The Court of Tax Appeals ordered the Commission of Internal Revenue (CIR) to refund to Cebu Portland Cement Co. about P350k+, w/c represented overpayments of ad valorem taxes on cement produced and sold by it.

CIR opposed the ruling, claiming that it had a right to apply the overpayment to another tax liability of Cebu Portland sales tax on a manufactured product (the cement). CIR said that cement is a manufactured and NOT a mineral product and therefore NOT exempt from sales taxes. (mineral = exempt; manufactured = not exempt)

On the other hand, Cebu Portland said that it is exempt from sales tax under the Tax Code because cement is a mineral product and NOT a manufactured product.

Court of Tax Appeals held that the alleged sales tax liability of Cebu Portland was still being questioned and therefore could not be set-off against the refund.

A petition for review was filed by CIR.

I: W/n CIR must refund the overpayment of the ad valorem tax

R: NO. CIR has the right to apply the overpayment to Cebu Portlands sales tax deficiency.

The sales tax was properly imposed upon the company for the reason that cement has always been considered a manufactured product and NOT a mineral product. (CIR v Republic Cement)

Cement was never considered a mineral product w/in the meaning of the Tax Code, despite it being composed of 80% mineral, because cement is a PRODUCT of the manufacturing process.

Reliance cannot be made on Cebu Portland v CIR saying that cement = mineral because this case has been overruled.

The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of the urgency of the need to collect taxes as the lifeblood of the government.

If the payment of taxes could be postponed by simply questioning their validity, the government would be paralyzed.

Thus, the Tax Code provides that no court shall have authority to grant an injunction or restrain the collection of taxes, except when in the opinion of the Court of Tax Appeals, the collection by the BIR or the Bureau of Customs may jeopardize the interest of the Government and/or the taxpayer.

In such a case, the Court, at any stage of the proceeding may suspend the collection and require the taxpayer to either:

1. deposit the amount claimed OR

2. file a surety bond for not more than double the amount with the Court.

The exception does not apply in this case. In fact, there is all the more reason to enforce the rule given that even after crediting of the refund against the tax deficiency, a balance of more than P4 million was still due from the company.

To require the Commissioner to actually refund to the company the amount of the judgment debt, which he will later have the right to distrain for payment of its sales tax liability is an idle ritual.

Commissioner of Internal Revenue v. Algue

The Phil. Sugar Estate Development Company (PSEDC) appointed Algue, Inc., a family corporation, as its agent, authorizing it to sell its land, factories, and oil manufacturing process.

Pursuant to this authority, five members of the family corporation formed the Vegetable Oil Investment Corp. and induced other persons to invest in it.

The newly formed corporation then purchased the PSEDC properties. For this sale, PSEDC gave Algue, Inc. a commission of P125,000.

From this amount, Algue Inc. paid the five family members P75,000 as promotional fees.

Algue, Inc. declared this P75,000 as a deduction from its income tax as a legitimate business expense.

The CIR questioned the deduction, claiming that it was not an ordinary, reasonable, or necessary expense and was merely an attempt to evade payment of taxes.

I: W/n the P75,000 is tax-deductible as a legitimate business expense of Algue, Inc. R: Yes, the P75,000 promotional fee is tax-deductible.

Sec. 30 of the Tax Code provides that ordinary and necessary expenses incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered are tax-deductible.

However, the burden in proving the validity of a claimed deduction belongs to the taxpayer. In this case, the burden has been satisfactorily discharged by the taxpayer Algue, Inc.

Algue, Inc. was able to prove that the promotional fees were not fictitious and were in fact paid periodically to the five family members. Moreover, the amount of the promotional fees was reasonable, considering that the five payees actually performed a service for Algue, Inc. by making the sale of the properties of PSEDC possible.

As a result of this sale, Algue, Inc. earned a net commission of P50,000.

Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it.

Hence, despite the natural reluctance to surrender part of ones hard-earned income, every person who is able to must contribute his share in running the government. The government, for its part, is expected to respond in the form of BENEFITS for general welfare. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary exaction by those in the seat of power.

However, it should also be exercised reasonably and in accordance with the prescribed procedure. If it is not, the taxpayer has a right to complain to the courts. C.N. Hodges v. Municipal Board of Iloilo

The Municipal Board of Iloilo enacted Ordinance No. 33 pursuant to the Local Autonomy Act w/c:

required persons, firms, assocs and corps to pay a sales tax of 1/2 of 1% of the selling price of any motor vehicle AND

prohibited the registration of the sale of the motor vehicle unless the tax had been paid

Hodges, who was engaged in the buying and selling of second-hand motors, questioned the validity of the tax for having been enacted in excess of authority.

I: W/n the tax is valid.

R: YES, the tax is valid.

The Local Autonomy Act gives municipal boards the authority to enact ordinances for the collection of taxes on any person engages in any occupation or business.

However, the LAA prohibits chartered cities, such as Iloilo from imposing a tax on the registration of motor vehicles. Thus, the lower court ruled that to require payment of sales tax before registration is tantamount to imposing a tax for the registration of motor vehicles.

HOWEVER, the SC disagreed with this, saying that the tax imposed was merely a coercive measure to make the enforcement of the contemplated sales tax more effective.

Taxes are imposed for the SUPPORT of the government in return for the general advantage and protection which the government affords to taxpayers and their property.

Taxes are the lifeblood of the government. The power to tax includes the power to devise ways and means to accomplish tax collection in the most effective manner. Otherwise, gov may falter / fail.

Thus, the ordinance is a VALID exercise of the power of taxation granted to Iloilo City by the LAA.

CLASSIFICATIONS AND DISTINCTIONS

Association of Customs Brokers Inc. v. Municipal Board

The Municipal Board of Manila passed an ordinance levying a property tax on all motor vehicles operating within the City of Manila.

The ordinance provided that the rate of the tax would be 1% ad valorem per annum, and that the proceeds of the tax shall accrue to the Streets and Bridges Funds of the City, w/c will be used for the repair, maintenance, and improvement of its streets and bridges.

The Charter of Manila gives the municipal board the power to tax motor vehicles, but this is limited by the Motor Vehicles Law, which disallows the imposition of fees on motor vehicles, EXCEPT property taxes imposed by a municipal corp.

THUS, the law allows the City of Manila to impose a property tax on motor vehicles operating within its limits.

However, the Association of Customs Brokers contended that the ordinance is void because it actually imposes a license tax in the guise of a property tax.

I: W/n ordinance is valid

R: No, it is void.

1) It imposes a license tax, which the municipal corporation may not impose, although it is made to appear as a property tax/

As a rule, an ad valorem tax is a property tax. However, if the tax is really imposed upon the performance of an act, enjoyment of a privilege, or the engaging in an occupation, it will be considered an EXCISE, even if its amount is determined in proportion to the value of the property used in connection with the occupation, privilege, or act which is taxed.

In this case, the tax is fixed ad valorem. BUT, the purpose is to raise funds for the repair, maintenance, and improvement of the streets and bridges in the city. Thus, it is actually a license fee under the guise of an ad valorem tax to circumvent the prohibition imposed by the Motor Vehicles Law.

The reason for the prohibition is that under the Motor Vehicles Law, municipal corporations already get proceeds for the purpose of repairing and maintaining their streets and bridges. The prohibition aims at preventing a duplication in the imposition of fees for the same purpose.

2) The ordinance infringes on the rule of uniformity of taxation because it exacts the tax upon ALL motor vehicles operating within the City of Manila, without distinguishing between those for hire and for private use, those registered in and those registered outside but occasionally come to Manila.

The ordinance imposes the tax only on those vehicles registered in Manila, even if those vehicles which are registered outside the city but which use its streets also contribute equally to the deterioration of the roads and bridges.

Esso Standard Eastern Inc. v. CIR

ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions.

The Commissioner on Internal Revenue (CIR) disallowed the claim on the ground that the expenses should be capitalized and might be written off as a loss only when a dry hole should result.

Hence, ESSO filed an amended return where it asked for the refund of P323,270 by reason of its abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary and necessary expenses in the same return amount representing margin fees it had paid to the Central Bank on its profit remittances to its New York Office.

I: W/n the margin fees are taxes OR necessary expenses which are deductible from its gross income R: No, they are neither taxes nor necessary expenses. 1) Margin fees are NOT taxes because they are NOT imposed as a revenue measure but as a police measure whose proceeds are applied to strengthen the countrys international reserves. Thus, the fee was imposed by the State in the exercise of its POLICE POWER and NOT taxation power. 2) Neither are they necessary and ordinary business expenses. An expense is considered NECESSARY where the expenditure is helpful in the development of the taxpayers business. It is ORDINARY when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The expenditure being ordinary and necessary is determined based on its nature the extent and permanency of the work accomplished by the expenditure. In this case, ESSO was unable to show that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. It merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires; which is erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations. Progressive Development Corp. v. QC

The City Council of QC passed an ordinance known as the Market Code of QC, which imposed a 5% supervision fee on gross receipts on rentals or lease of privately-owned market spaces in QC.

In case of failure of the owners of the market spaces to pay the tax for three consecutive months, the City shall revoke the permit of the privately-owned market to operate.

Progressive Development Corp, owner and operator of Farmers Market, filed a petition for prohibition against QC on the ground that the tax imposed by the Market Code was in reality a tax on income, which the municipal corporation was prohibited by law to impose.

I: W/n the supervision fee is an income tax or a license fee.

R: It is a license fee.

A LICENSE FEE is imposed in the exercise of the police power primarily for purposes of regulation, while TAX is imposed under the taxing power primarily for purposes of raising revenues.

If the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally, revenue is also obtained does not make the imposition a tax.

To be considered a license fee, the imposition must relate to an occupation or activity that so engages the public interest in health, morals, safety, and development as to require regulation for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation but also its incidental consequences.

In this case, the Farmers Market is a privately-owned market established for the rendition of service to the general public. It warrants close supervision and control by the City for the protection of the health of the public by insuring the maintenance of sanitary conditions, prevention of fraud upon the buying public, etc.

Since the purpose of the ordinance is primarily regulation and not revenue generation, the tax is a license fee. The use of the gross amount of stall rentals as basis for determining the collectible amount of license tax does not, by itself, convert the license tax into a prohibited tax on income.

Such basis actually has a reasonable relationship to the probable costs of regulation and supervision of Progressives kind of business, since ordinarily, the higher the amount of rentals, the higher the volume of items sold.

The higher the volume of goods sold, the greater the extent and frequency of supervision and inspection may be required in the interest of the buying public.

PAL v. Edu

Under a legislative franchise, Philippine Airlines is exempt from all taxes except for the payment of 2% of its gross revenue to the National Government.

On the strength of an opinion of the Secretary of Justice, PAL was determined not to have been paying motor vehicle registration fees since 1956.

Eventually, the Land Transportation Commissioner required all tax exempt entities, including PAL, to pay motor vehicle registration fees.

PAL protested.

I: W/n PAL is exempt from the payment of motor vehicle registration fees

R: YES, PAL is exempt.

The motor vehicle registration fee is a tax, to which PAL is exempt.

Taxes are for revenue, while fees are exactions for purposes of regulation and inspection. Thus, fees are limited in amount to what is necessary to cover the cost of the services rendered in that connection.

It is the OBJECT of the charge, and NOT the name, that determines whether a charge is a tax or a fee.

In this case, the money collected under the Motor Vehicle Law is not intended for the expenditures of the Motor Vehicle Office but for the construction and maintenance of public roads, streets and bridges.

Thus, since the said fees are collected NOT for the regulating motor vehicles on public highways but for providing REVENUE for the gov in order to construct public highways, they are TAXES, not merely fees.

PAL is exempt from paying such fees, except for the period between 27 June 1968 to 9 April 1979, where its tax exeption in the franchise was repealed.

Villegas v. Hiu Chiong Tsai Pao Ho

The Municipal Board of Manila passed an ordinance prohibiting an alien from being employed or engaging in any position or occupation or business enumerated therein, whether permanent, temporary, or casual, without first securing an employment permit from the Mayor and paying the P50 permit fee.

Hiu Chiong filed an action to restrain the enforcement of the ordinance and to have it declared null and void for being discriminatory and violative of the rule on uniformity in taxation.

The Mayor argued that the ordinance cannot be declared null and void on the ground that it violates the rule on uniformity of taxation because this rule applies only to purely tax or revenue measures and not to regulatory measures, such as the ordinance.

I: W/n the ordinance is valid.

R: NO, the ordinance is void. The first part of the ordinance requiring an alien to secure an employment permit is regulatory in character because it involves the exercise of discretion on the part of the Mayor in approving or disapproving the applications. However, the second part which requires the payment of P50 as employees fee is not regulatory but a revenue measure. There is no logic or justification in exacting P50 from aliens who have been cleared for employment. The obvious purpose of the ordinance is to raise money under the guise of regulation.

The P50 fee is unreasonable not only because it is excessive but because it fails to consider valid substantial differences in situation among individual aliens who are required to pay it. The same amount is being collected from every employed alien, whether he is casual or permanent, part time or full time, or whether he is a lowly employee or a highly paid executive.

Compania General de Tabacos v. City of Manila

Tabacalera paid for its liquor license and also paid sales tax on its sale of general merchandise, including liquor.

It claimed that it made an overpayment and demanded a refund of the sales tax paid on the ground that since it already paid the license fees, it was no longer bound to pay the sales tax on the liquor.

I: W/n Tabacalera is liable for sales tax on the liquor despite already having paid for its liquor license.

R: YES, Tabacalera is liable.

Generally, the term tax applies to all kinds of exactions which become public funds. Legally, however, a license fee is a legal concept quite distinct from tax.

Taxes are for raising revenues while license fees are imposed in the exercise of police power for purposes of regulation.

Under on ordinance, Tabacalera must pay license fees in order to continue enjoying the privilege of selling liquor, considering that the sale of intoxicating liquor is potentially harmful to public health and morals, and must be subject to State regulation.

Under another ordinance, Tabacalera is liable for sales tax on sales of general merchandise, including liquor.

Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article, without it being in violation of the rule against double taxation.

American Mail Lines v. City of Basilan

The City Council of Basilan enacted an ordinance imposing an anchorage fee on foreign vessels, which anchor within its territorial waters.

The anchorage fee was centavo per ton of the vessel for every 24 hours or part thereof, provided that the maximum charge shall not exceed P75 per day.

American Mail Lines, et al questioned the validity of the ordinance on the ground that the City of Basilan had no authority to collect anchorage fees from foreign vessels.

The City of Basilan argued that the ordinance was a valid exercise of the citys police power and that the fees were for purely regulatory purposes. It claimed that since the City of Basilan was an island with mountainous coasts and fringed by coves, bays and islets, there was a need for funds to suppress possible smuggling activities.

I: W/n the ordinance was valid R: NO, the ordinance is void.

The Charter of the City of Basilan gives the Council the authority to fix the charges to be paid by all watercraft landing at or using public wharves, docks, levees, or landing places. The anchorage fees are not included in this power, as shown by the need of the Council to enact the amendatory ordinance.

Contrary to the claim of the Council, the anchorage fees are not being charged for regulatory purposes. They are actually intended for revenue purposes.

The power to regulate as an exercise of police power does NOT include the power to impose fees for revenue purposes. Fees for purely regulatory purposes may only be of sufficient amount to include:

expenses of issuing the license AND

cost of the necessary inspection / police surveillance,

taking into account INCIDENTAL expenses

In this case, the fees were based on the tonnage of the vessels. This basis of fixing the fees has no reasonable relation to the cost of issuing permits and the cost of inspection or surveillance.

Also, the fee imposed on foreign vessels centavo per ton for the first 24 hours, and which shall not exceed P75 per day exceeded even the harbor fee imposed by the National Government, which was only P50.

Lastly, the citys own contention that the ordinance was enacted in the exercise of taxation power makes it obvious that the fees were not merely regulatory.

THUS, the fees were intended for revenue purpose and NOT for regulatory purposes.

Osmea v. Orbos

Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund (OPSF), which was designed to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from:

exchange rate adjustments AND

increases in the world market prices of crude oil

A portion of the OPSF was taken from collections of ad valorem taxes levied on oil companies.

Subsequently, by virtue of an EO, the OPSF was reclassified into a trust liability account and ordered released from the NATIONAL TREASURY to the MINISTRY of Energy. Said EO also authorized the investment of the fund in government securities, with the earnings accruing to the fund.

Aquino then amended PD 1956 by promulgating EO 137, w/c expanded the grounds for reimbursement to oil companies for possible COST UNDERRECOVERY inccured resulting from the reduction of domestic prices on petroleum products. The said cost underrecovery was left to the determination of the Ministry of Finance.

Osmena then questioned the creation of the trust fund, saying that it violates the Constitution.

This is because the money collected pursuant to PD 1956 is a special fund, and under the Constitution, if a special tax is collected for a specific purpose, the revenue generated from it shall be treated as a SPECIAL FUND to be used only for the indicated purpose. It must not be channeled to another government objective.

I: W/n the creation of the trust fund is violative of the Constitution

R: NO, creation of the trust fund was valid.

In order for the funds to fall under the prohibition, it must be shown that they were collected as TAXES as a form of revenue

While the funds collected may be referred to as taxes, they are exacted in the exercise of the POLICE POWER of the State .

The main objective was NOT revenue but to stabilize the price of oil and petroleum.

The OPSF is actually a SPECIAL FUND, as seen from the special treatment given to it by EO 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA.

These measures thus comply with the constitutional description of a "special fund."

What is here involved is not so much the power of taxation as police power.

For a valid delegation of power, it is essential that the law delegating the power must be:

1) complete in itself -- must set forth the policy to be executed by the delegate

2) it must fix a standard limits of whichare sufficiently determinate or determinable to which the delegate must conform.

Such was fulfilled in this case.

Republic v. Bacolod-Murcia Milling Co.

The Philippine Sugar Institute (Philsugin), a semi-public corporation, was created for the purpose of conducting research to advance the countrys sugar industry.

To carry out these objectives, the charter of Philsugin authorized the levy of 10 cents / picul of sugar for 5 years to be collected from sugar cane planters in the country.

The proceeds of this levy would go to a special fund to be used exclusively by Philsugin.

Philsugin then purchased the Insular Sugar Refinery using money from this special fund.

Several years later, Insular Sugar Refinery had accumulated tremendous losses.

3 sugar centrals refused to continue paying their contributions to the fund, given that the purchase of the Insular Sugar Refinery by Philsugin was NOT authorized by its charter, and its continued operation was inimical to their interests.

They also contended that their obligation to pay their contributions subsisted ONLY to the EXTENT that they were benefited by the contributions, since the levy was merely a special assessment and not a tax.

I: W/n the levy was a special assessment or a revenue measure

R: It was NEITHER!

The levy for the Philsugin Fund is not so much an exercise of the power of taxation nor the imposition of a special assessment, but the exercise of the POLICE POWER for the general welfare of the entire country.

It is therefore an exercise of a sovereign power, which no private citizen may lawfully resist.

In Lutz v. Araneta, Court held that since sugar production is one of the leading industries of our nation, its development redounds greatly to the general welfare. Thus, the Legislature found it in the interest of the general welfare to stabilize the sugar industry through the power of taxation.

Moreover, the charter of Philsugin authorizes it to conduct research in the sugar industry in order to find ways to reduce the cost of production and achieve greater efficiency in the industry. This provision justifies the acquisition of the refinery, since there is no better way to carry out this research than to actually operate a refinery.

Even if the operations of the refinery suffered from losses, Philsugins experience of running the refinery is a GAIN to the industry. Hence, the sugar centrals were still benefited by the acquisition.

TAX vs. SPECIAL ASSESSMENT:

The purpose of a special assessment is to finance the improvement of particular properties, w/ the benefits of the improvement accruing to the owners thereof who pay the assessment.

The purpose of an ordinary tax is to provide the Government with revenues needed for the financing of state affairs. Refusal of a citizen to pay taxes may not be sanctioned because it would impair government functions. This would not hold true in the case of a refusal to comply with a special assessment.

Victorias Milling v. Municipality of Victorias

The municipal council of Victorias enacted Ordinance 1 w/c required sugar centrals operating w/in the municipality to pay an annual municipal license tax.

Based on the ordinance, Victorias Milling was assessed 40K (imposed on sugar centrals) and another 40K (imposed on sugar refineries).

Thus, Victorias Milling filed a suit to declare the ordinance void since it:

a) exceeds the amount fixed in Provincial Circular 12-A issued by the Finance Dept

b) is discriminatory, as it singles out VM, w/c is the only operator of a sugar central and a sugar refinery within the jurisdiction of defendant municipality

c) constitutes double taxation

d) the national government has preempted the field of taxation with respect to sugar centrals or refineries

The lower court held that the exaction was invalid because the municipality CANNOT impose a tax for revenue in the guise of a police measure. The amounts set forth in the ordinance also exceeded the cost of licensing, regulating, and surveillance.

I: W/n the ordinance was valid.

R: The ordinance was valid.

The ordinance was promulgated not in the exercise of the municipality's regulatory power but as a REVENUE measure, authorized by Commonwealth Act 472.

Under this, a municipality is authorized to impose three kinds of licenses:

1) license for regulation of useful occupations / enterprises

2) license for restriction/ regulation of non-useful occupations or enterprises

3) license for revenue

The first 2 fall w/in police power, while the 3rd is for revenue purposes.

The license fee in this case falls under #3 and is valid.

Generally speaking, it is NOT a license fee, but rests on taxing power, w/c must be expressly conferred by statute upon the municipality.

There is no double taxation because the company is being taxed for the same object: One tax is on sugar centrals and the other is on sugar refineries. It just so happens that the company is both. [Also, the tax was imposed based on capacity of the sugar centrals to produce, so it was really a license on the occupation or business of sugar centrals and sugar refineries and not on the sugar itself; hence there was no identity of object of taxation]. There is no discrimination despite the fact that the company is the only sugar producing entity in the municipality. Victorias Milling is not named in the ordinance and should another corporation decide to produce sugar in the area, it will be taxed accordingly.

GR: If not for police inspection, supervision, regulation = it is a revenue measure!

Lutz v. Araneta

Commonwealth Act 567 or the Sugar Adjustment Act, was promulgated in 1940 in response to the imminent threat to the sugar industry by the imposition of export taxes upon sugar as provided in the Tydings-McDuffie Act, and the eventual loss of its preferential position in the US market.

In order to stabilize the sugar industry to prepare for the loss, CA 567 provided for an INCREASE in the existing tax on the manufacture of sugar (on a graduated basis), the proceeds of which would accrue to the Sugar Adjustment and Stabilization Fund (a special fund in the Phil Treasury).

Walter Lutz, in his capacity as administrator of the Estate of Antonio Ledesma, wanted to recover from the Collector of Internal Revenue the amount paid by the estate as taxes, alleging that the tax imposed by CA 567 is unconstitutional, being levied for the aid and support of the sugar industry exclusively, which is NOT a public purpose.

I: W/n the tax is unconstitutional because it is not devoted to a public purpose.

R: The tax is valid!

The defect in the argument of Lutz is his assumption that the tax provided for in CA 567 is a pure exercise of the taxing power.

In reality, the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. Thus, it is primarily an exercise of police power.

Sugar production is one of the great industries of our nation. Sugar:

Occupies the leading position among export products

Gives employment to thousands of laborers

Is an impt source of foreign exchange

Thus, its development redounds to GEN. WELFARE and the legislature may determine within reasonable bounds what is necessary for its protection and promotion. Taxation may be made the implement of the States police power.

It is inherent in the power to tax that a state be free to select the subjects of taxation, so the argument that the tax to be levied burdens sugar producers themselves does not hold water.

It does not matter that the funds raised under the Sugar Stabilization Act should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected; legislature is not reqd by the Consti to adhere to the policy of all or none.

Lastly, the taxation does not constitute expenditure of tax money for private purposes, since the funds will be used to increase sugar production, solve problems and improve working conditions in sugar mills.

PCGG v Cojuangco

After the EDSA Revolution, Pres Aquino issued EOs 1, 2 and 14:

EO 1 created the Presidential Commission on Good Government (PCGG) to assist the President in the recovery of ill-gotten wealth accumulated by former Pres Marcos and his family.

EO 2 states that the ill-gotten wealth is in the form of properties located in the the Phils and other countries.

EO 14 empowered PCGG w/ assistance of the SolGen and other gov agencies, to file and prosecute cases under EOs 1 and 2.

Pursuant to these laws, the PCGG issued and implemented numerous sequestrations, freeze orders and provisional takeovers of properties of allegedly ill-gotten companies.

Among the properties sequestered were shares of stock in the UCPB (United Coconut Planters Bank), the so-called CIIF Companies (Coconut Industry Investment Fund companies) and Cojuangco, Jr.

Sandiganbayan then issued a resolution lifting the sequestration of the UCPB shares on the ground that respondents COCOFED and the CIIF Companies were NOT been impleaded by the PCGG as parties-defendants.

PCGG challenged the said resolution.

Meanwhile, Sandiganbayan ordered the holding of elections for the UCPB Board of Directors. It also allowed the sequestered shares to be voted by their registered owners.

Thus, respondents COCOFED, Cojuangco, etc, as registered owners, were allowed to exercise their right to vote their shares of stock in UCPB at the Stockholders Meeting, and exercise their stockholders rights.

Republic of the Phils then contended that the Sandiganbayan committed GAD in enjoining the PCGG from voting the sequestered shares of stock in the UCPB, despite the fact that:

the sequestration shares were purchased with coconut levy funds, which were PUBLIC in character, AND

A previous resolution allowed the PCGG to vote the sequestered shares

I: W/n the coconut levy funds partake of the nature of taxes, and if the answer is in the affirmative, w/n they constitute public funds

R: The coconut levy funds partake of the nature of taxes w/c constitute public funds

Generally, the right to vote sequestered shares of stock registered in the names of private individuals / entitles alleged to have been acquired with ill-gotten wealth shall be exercised by the REGISTRED OWNERS.

HOWEVER, the PCGG may be granted such voting right provided it can show:

prima facie evidence that the shares are indeed ill-gotten

there is imminent danger of dissipation of the assets, necessitating their continued sequestration and voting by the government until a final decision on their ownership is promulgated by the proper court

In this case, coconut levy funds partake of the nature of taxes which, in general, are enforced proportional contributions from persons and properties, exacted by the State by virtue of its sovereignty for the support of government and for all public needs.

Based on this definition, a tax has 3 elements, namely that it is:

an enforced proportional contribution from persons and properties

imposed by the State by virtue of its sovereignty

levied for the support of the government.

Taxation is done not merely to raise revenues to support the government, but also to provide means for the rehabilitation and the stabilization of a threatened industry affected by public interest, as to be within the police power of the State.

The court in its earlier pronouncements stressed that the coconut levy funds are not only affected with public interest but are also prima facie, PUBLIC FUNDS -- money raised by operation of law to support the gov in the discharge of its obligations.

Consequently, the government should be allowed to continue voting since the shares were purchased w/ coconut levy funds, w/c are public in character and affected w/ public interest.

Commissioner on Internal Revenue v PLDT

PDLT paid the BIR about P164k+ for equipment and spare parts it imported for its business. The amount included compensating, advance sales and other internal revenue taxes. PLDT also paid VAT.

As a franchise holder, PLDT was entitled to a tax exemption privilege under RA7082 (grant of franchise), which provided that the grantee should pay a franchise tax equivalent to 3% of all gross receipts, and that the said percentage shall be in LIEU of all taxes on the franchise/ its earnings.

PLDT wrote to the BIR requesting confirmation of its exemption privilege, and BIR confirmed this, saying that PLDT was liable for the 3% franchise tax and exempt from VAT on its importation of equipment.

PLDT filed a claim for tax refund of the VAT, compensating taxes, advance sales taxes and other taxes it had been paying erroneously from October, 1992- December, 1994.

CTA granted the petition (although ruling that a portion from Oct-Dec16, 1992 had already prescribed and was beyond the 2-yr period allowed by law for refunds), ordering CIR to REFUND or to ISSUE in favor of petitioner a Tax Credit Certificate in the reduced amount of about P223k+ representing erroneously paid VAT and other taxes (compensating, advance sales, importation) from 1992 to 1994.

Judge Saga dissented, saying who clarified that the in lieu of provision of Sec12 refers only to DIRECT taxes and not to indirect taxes such as VAT, compensating tax, and advance sales tax.

BIR moved for reconsideration and the same was denied. CA also dismissed its appeal.

I: W/n PLDT is exempt from payment of VAT other taxes by virtue of the provision in its franchise that the 3% franchise tax on its gross receipts shall be in lieu of all taxes on its franchise / earnings

R: NO, PLDT is not exempt from VAT and other taxes

Court has always ruled that TAXATION is the RULE, and exemption is the exception. Thus, statutes granting tax exemptions must be construed strictly against the taxpayer and liberally in favor of the taxing authority.

The burden of justfying exemption is imposed on the one who claims a refund.

The clause in lieu of all taxes in Sec 12 of RA 7082 is immediately followed by the limiting or qualifying clause on this franchise or earnings thereof, suggesting that the exemption is limited to taxes imposed DIRECTLY on PLDT since taxes pertaining to PLDTs franchise or earnings are its direct liability.

Thus, indirect taxes, not being taxes on PLDTs franchise or earnings, are OUTSIDE the purview of the in lieu provision.

The 10% VAT on importation of goods partakes of an excise tax levied on the privilege of importing articles. It is NOT a tax on the franchise of a business enterprise, but is imposed on all taxpayers who import goods whether or not the goods will eventually be sold, bartered, exchanged or utilized for personal consumption.

The VAT on importation replaces the advance sales tax payable by regular importers who import articles for sale or as raw materials in the manufacture of finished articles for sale.

Direct taxes - impositions for which a taxpayer is directly liable on the transaction or business he is engaged in Indirect taxes - those where the liability for the payment of the tax falls on one person but the burden can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it

In this case, advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for sale or of raw materials to be processed into merchandise can shift the tax / lay the economic burden of the tax on the purchaser, by subsequently adding the tax to the selling price of the imported article or finished product

Compensating tax also partakes of the nature of an excise tax payable by all persons who import articles, whether in the course of business or not. (Purpose: to place, for tax purposes, persons purchasing from merchants in the Philippines on a more or less equal basis with those who buy directly from foreign countries)

Planters Products Inc v Fertiphil

Marcos issued LOI 1465, imposing a capital recovery component of Php10.00 per bag of fertilizer. The levy was to continue until adequate capital was raised to make PPI financially viable

Fertiphil remitted to the Fertilizer and Pesticide Authority (FPA), which then remitted said amount to Far East Bank and Trust Company, the depository bank of PPI. P6k+ was remitted from 1985 to 1986.

After EDSA, Fertiphil demanded from PPI a refund of the amount it remitted; PPI refused.

Fertiphil filed a complaint for collection and damages, questioning the constitutionality of LOI 1465.

They claimed it was unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process

FPA on the other hand said that the issuance of LOI 1465 was a valid exercise of police power of the state in insuring the fertilizer industry, and that Fertiphil did not sustain any damage because the burden imposed by the levy fell on the ultimate consumer, not the seller

I: 1. W/m the issuance of LOI 1465 was an exercise of the police power of the state - NO

2. W/n the levy was for a public purpose - NO

R:

1. The imposition of the levy was a exercise of the taxation power of the state.

While it is true that the power to tax can be used as an implement of police power, the primary purpose of the levy was revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax.

In this case, the imposition of Php10 per bag is too excessive to serve a mere regulatory purpose.

Even if it was an exercise of the police power of the state, the LOI would still be invalid as it did not comply with the test of lawful subjects and lawful means -- specifically, that the interest of the public, generally, requires its exercise, and that the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.

2. LOI 1465 is not for a public purpose.

The purpose for the issuance of LOI 1465 was to support a private company:

First, it is expressly provided that the levy be imposed to benefit a private company PPI.

Second, the levy was conditional and dependent on PPI becoming financially viable.

Third, the levies were directly remitted and deposited in FEBTC, the bank of PPI, which used said remittances to pay of PPIs debts.

LIMITATIONS ON THE POWER OF TAXATION

Pascual v Secretary of Public Works

Congress passed an RA appropriating P85K for the construction of Pasig

feeder road terminals.

The Provincial Governor of Rizal filed an action for declaratory relief and

injunction, claiming that at the time of the passage and approval of the

Act, these feeder roads had not yet been constructed and were not

connected to any government property or main highway. The feeder

roads were actually within the Antonio Subdivision, which was owned by

Jose Zulueta, a member of the Senate of the Philippines. Zulueta, before

the passage of the Act, had offered to donate the property to the

municipality of Pasig, but the deed of donation was executed only several

months after the RA was passed. Hence, Congress appropriated public

funds for the construction of feeder roads that were, at the time the law

was passed, private property.

ISSUE: Whether the appropriation is valid.

HELD:

The appropriation is invalid.

The taxing power must be exercised for public purposes only and not for

the advantage of private individuals. The right of the legislature to

appropriate public funds is correlative with its right to tax. As the

Constitution prohibits taxation except for a public purpose, so also no

appropriation of state funds can be made other than for a public purpose.

The test of the constitutionality of a statute requiring the use of public

funds is whether the statute is designed to promote the public interests as

opposed to the furtherance of the advantage of individuals, although such

advantage to individuals might incidentally serve the public.

Even if subsequently, Zulueta executed the deed of donation in favor of

the municipality, making the roads public property, the appropriation is

still invalid. The validity of the statute depends upon the powers of

Congress at the time of its passage, not upon events occurring after. At

the time the bill was passed, the road was still private property.

Therefore, the appropriation sought a private purpose and was null and

void. The subsequent donation could not have cured this nullity.Osmena v Orbos

Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund (OPSF), which was designed to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from:

exchange rate adjustments AND

increases in the world market prices of crude oil

A portion of the OPSF was taken from collections of ad valorem taxes levied on oil companies.

Subsequently, by virtue of an EO, the OPSF was reclassified into a trust liability account and ordered released from the NATIONAL TREASURY to the MINISTRY of Energy. Said EO also authorized the investment of the fund in government securities, with the earnings accruing to the fund.

Aquino then amended PD 1956 by promulgating EO 137, w/c expanded the grounds for reimbursement to oil companies for possible COST UNDERRECOVERY inccured resulting from the reduction of domestic prices on petroleum products. The said cost underrecovery was left to the determination of the Ministry of Finance.

Osmena then questioned the creation of the trust fund, saying that it violates the Constitution.

This is because the money collected pursuant to PD 1956 is a special fund, and under the Constitution, if a special tax is collected for a specific purpose, the revenue generated from it shall be treated as a SPECIAL FUND to be used only for the indicated purpose. It must not be channeled to another government objective.

I: W/n the creation of the trust fund is violative of the Constitution

R: NO, creation of the trust fund was valid.

1. For the funds to fall under the prohibition, it must be shown that they were collected as TAXES as a form of revenue

While the funds collected may be referred to as taxes, they are exacted in the exercise of the POLICE POWER of the State .

The main objective was NOT revenue but to stabilize the price of oil and petroleum.

The OPSF is actually a SPECIAL FUND, as seen from the special treatment given to it by EO 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA.

These measures thus comply with the constitutional description of a "special fund."

2. Also, there was no undue delegation of taxation power because the law provides a sufficient standard by which the authority must be exercised.

For a valid delegation of power, it is essential that the law delegating the power must be:

1) complete in itself -- must set forth the policy to be executed by the delegate

2) it must fix a standard limits of which are sufficiently determinate or determinable to which the delegate must conform.

In this case, there was a sufficient standard, which is the general policy of the law to protect the consumer by stabilizing and subsidizing petroleum prices.

Pepsi-Cola v Municipality of Tanauan

This case involved 2 Municipal Ordinances and the Local Autonomy Act (RA 2264):

The Local Autonomy Act (RA 2264) grants municipalities the authority to impose municipal taxes or fees upon persons engaged in any occupation or business within their jurisdictions, provided that they were not allowed to impose percentage tax on sales and on items already subject to specific tax under the NIRC

Municipal Ordinance No. 23 of Tanauan, Leyte imposes on soft drink producers and manufacturers a tax of 1/16 of a centavo for every bottle of soft drink corked.

Municipal Ordinance No. 27 imposes on soft drinks produced or manufactured a tax of 1 centavo on each gallon of volume capacity.

Pepsi filed an action to declare the Local Autonomy Act and the two ordinances void. It claimed that RA 2264 is an undue delegation of power.

I: W/n RA 2264 constitutes an undue delegation of power - NO

2. Whether MOs 23 and 27 are valid YES!

R:

1. RA 2264 is not an undue delegation of power.

The power of taxation may be delegated to local governments in respect of matters of local concern.

This is not to say though that the constitutional injunction against deprivation of property without due process of law may be passed over under the guise of the taxing power, except when the taking of property is in the lawful exercise of the taxing power, as when:

the tax is for a public purpose;

the rule on uniformity of taxation is observed;

either the person or property taxed is within the jurisdiction of the

government levying the tax; and

in the assessment and collection of certain kinds of taxes, notice and opportunity for hearing are provided.

The delegation of the taxing power to the municipal corporation cannot be assailed either on the ground of double taxation. Double taxation is prohibited only when the taxpayer is taxed twice for the same benefit by the same entity for the same purpose, not where one tax is imposed by the State and the other by a municipality.

2. The MOs are valid.

MO No. 27 is not a tax on sales but on the produce, since it is based on volume capacity.

Neither is it a specific tax because soft drinks do not fall within the enumeration of items subject to specific tax. The rate of the tax is also reasonable and cannot be said to be unfair or oppressive.

Municipalities are empowered to impose, not only municipal license taxes

upon persons engaged in any business or occupation, but also to levy for public purposes, just and uniform taxes.

SSS v City of Bacolod

The SSS had an office building in Bacolod City. It failed to pay realty taxes for three consecutive years. The City levied upon the property and forfeited it in its favor.

SSS protested the forfeiture on the ground that the SSS, being a government owned and controlled corporation, is exempt from payment of real estate taxes.

The CFI ruled that SSS is NOT covered by the exemption, saying that the exemption only applies to properties owned by government agencies and instrumentalities performing governmental/ sovereign functions.

It excluded from the coverage of the exemption those performing proprietary functions, such as the SSS. It relied on the case of NACOCO v. Bacani in which the Court held that government agencies performing proprietary functions are NOT exempt from paying legal fees.

I: W/n a GOCC performing proprietary functions like the SSS, is exempt from paying realty taxes.

R: Yes. The SSS is exempt from paying realty taxes.

The Charter of the City of Bacolod provides that lands and buildings owned by the government are exempt from realty taxes.

The application of the NACOCO v. Bacani case is incorrect, since that case was referring to legal fees and NOT to realty taxes. For purposes of exemptions in the payment of realty taxes, the distinction between government agencies performing constituent and ministrant function is not important.

What is decisive is merely that the properties possessed by the SSS are in fact owned by the government of the Philippines. As such, they are exempt from realty taxes.

To make such a distinction would have the effect of taking money from one pocket and putting it in another pocket. It would not serve the main purpose of taxation and would even tend to defeat it, because of the paperwork, time, and expenses that it would entail.

When public property is involved, exemption is the rule and taxation, the exception

Manila Intl Airport Authority v City of Pque

As operator of the NAIA, the Manila Intl Aiport (MIAA) administers the land, improvements and equipment within the NAIA complex. The MIAA charter transferred to the MIAA approximately 600 hectares of land, including runways and buildings. The charter also provided that no portion of the land transferred to the MIAA shall be disposed of through sale or any other mode unless approved by the President.

The Office of the Government Corporate Counsel was of the opinion that the local government code withdrew the exemption from real estate tax granted to MIAA.

MIAA paid some of the real estate taxes due but was also held delinquent.

The City of Paranaque threatened to sell the Airport lands should MIAA fail to pay the real estate delinquency.

MIAA filed a petition for injunction but CA dismissed this.

MIAA. A day before the scheduled public auction, the MIAA filed a motion for an issuance of a TRO before the SC which the SC granted immediately.

However the respondents received the TRO 3 hours after the conclusion of the public auction, so the SC issued a resolution confirming nunc pro tunc (now for then) the TRO.

I: W/n the Airport lands and buildings of MIAA are exempt from real estate taxes under existing laws

Held: YES, it is.

1. A GOCC is NOT exempt from real estate tax.

However, MIAA is NOT a GOCC. A GOCC must be organized as a stock or non-stock corporation. MIAA is not organized as a stock or non-stock corporation.

MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions. It is like any other gov instrumentality, but is NOT vested w/ corporate powers.

A government instrumentality like MIAA falls under the LGC w/c states that local govs CANNOT tax the national government, w/c delegates the power to tax to local govs. The power of local govs to tax is subject to Congress limitations.

2. Airport lands and buildings of MIAA are property of public dominion, devoted to public use, and are owned by the State (Art 420 Civ Coderoads, ports owned by state).

Thus, they are outside the commerce of man and CANNOT be the subject of sale. Unless the President issues a proclamation withdrawing the Airport lands and Buildings from public use, these properties remain properties of public dominion and are inalienable.

MIAA is merely holding title to the Airport lands and buildings in TRUST for the Republic. This is made clearer by the fact that only the President can sign such deed of conveyance involving said property.

The transfer of the said property to the MIAA was meant to implement a reorganization. The MIAA charter transferred Airport lands and buildings to MIAA without the Republic receiving any cash. The purpose was to reorganize a division in the Bureau of Air Transportation into a separate and autonomous body. The Republic remains the beneficial owner of the lands and buildings.

LGC exempts from real estate tax any real property owned by the Republic of the Philippines.

It also states that real property owned by the Republic loses its tax exemption ONLY if the beneficial use thereof has been granted, to a taxable person. MIAA is not a taxable person.

HOWEVER, portions of the lands and buildings that MIAA leases to private entities are NOT exempt from real estate tax.

Sea-Land Services Inc. v. CA: International Comity

Sea-Land, an American shipping company, entered into a contract with the US Government for the transport of military household goods and effects of US military personnel assigned to the Subic Naval Base.

The BIR collected 1.5% income tax on the income derived by Sea-Land, which Sea-Land paid.

Later, Sea-Land asked for a refund, claiming that it had paid the tax by mistake. It invoked the tax exemption provided in the RP-US Military Bases Agreement, which exempts from tax any profit derived by a US national under a contract with the US government in connection with the construction, maintenance, operation, and defense of the bases.

Sea-Land filed a petition for review with the CTA to judicially pursue its claim for refund and to stop the running of the 2-year prescriptive period.

CTAs & CA denied refund.

I: W/N Sea-Land falls within the coverage of the tax exemption. NO R: The transport or shipment of household goods and effects of USmilitary personnel is not included in the term construction, maintenance, operation, and defense of the bases. Neither can the activity be interpreted as directly related to the defense and security of the Philippine territories. It is therefore not covered by the exemption.

Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The law does not look with favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.

The avowed purpose of tax exemption is some public benefit or interest, which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption. The hauling or transport of household goods and personal effects of U. S. military personnel would not directly contribute to the defense and security of the Philippines.

CIR v. Mitsubishi Metal Corp.: International Comity

Atlas Consolidated Mining entered into a Loan and Sales Contract with Mitsubishi. Under the Contract, Mitsubishi would lend Atlas $20M for the installation of a new concentrator for copper production, and in turn, Atlas would sell to Mitsubishi all the copper concentrates produced from the machine for the next 15 years.

Thereafter, Mitsubishi applied for a loan with Eximbank of Japan and other consortium of Japanese banks so that it could comply with its obligations under the contract. The total amount of both loans was $20M.

Approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as loanto Atlas and as consideration for importing copper concentrates from Atlas.

Atlas made interest payments in favor of Mitsubishi totaling P13M. The corresponding 15% tax on the interest in the amount of P1.9M was withheld and remitted to the Government.

Subsequently, Mitsubishi and Atlas filed a claim for tax credit, requesting that the P1.9M be applied against their existing tax liabilities on the ground that the interest earned by Mitsubishi on the loan was exempt from tax.

The NIRC provides that income received from loans in the Philippines extended by financing institutions owned, controlled, or financed by foreign governments are exempt from tax.

Mitsubishi and Atlas claim that the interest earned from the loan falls under the above exemption because Mitsubishi was merely acting as an agent of Eximbank, which is a financing institution owned, controlled, and financed by the Japanese Government. They allege that Mitsubishi was merely the conduit between Atlas and Eximbank, and that the ultimate creditor was really Eximbank.

I: W/N the interest income from loans extended to Atlas by Mitsubishi is excluded from gross income taxation and therefore excluded from withholding tax. NO

R: Mitsubishi was not a mere agent of Eximbank. It entered into the agreement with Atlas in its own independent capacity. The transaction between Mitsubishi and Atlas on the one hand, and between Mitsubishi and Eximbank on the other, were separate and distinct.

Thus, the interest income of the loan paid by Atlas to Mitsubishi is entirely different from the interest income paid by Mitsubishi to Eximbank. What was subject of the withholding tax is not the interest income paid by Mitsubishi to Eximbank but the interest income earned by Mitsubishi from the loan to Atlas.

Since the transaction was between Mitsubishi and Atlas, the exemption that would have been applicable to Eximbank, does not apply. The interest is therefore not exempt from tax.

It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas, but this only proves the justification for the loan as represented by Mitsubishi which is a standard banking practice for evaluating the prospects of due repayment.

Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. While international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening means to violate our tax laws. Otherwise, the mere expedient of having Phil corp enter into a contract for loans with private foreign entities, which in turn will negotiate independently with their governments, could be availed to take advantage of the tax exemption law under discussion.

31st Infantry Post Exchange v. Posadas: International

Comity

The 31st Infantry Post Exchange was an agency under the control of the US Army, operating in the Philippines. The Exchange bought goods, such as soap and toiletries, and resold them to officers, soldiers, and civilian employees of the US Army and their families.

The proceeds derived from the sales were then used for the betterment of the condition of the personnel of the Army.

In the course of its business, the Exchange purchased goods from merchants in the Philippines. The Collector of Internal Revenue collected from these merchants taxes at the rate of 1.5% of the gross value sold by them to the Exchange.

The Exchange filed an action for prohibition against the CIR for him to desist from collecting the taxes from the merchants. The Exchange claims that the taxes imposed on the merchants were driving up the prices of goods sold to it by the merchants.

The Exchange claims that the merchants should be exempt from taxes since the revenue law provides that no specific tax shall be collected on any goods sold and delivered directly to the US Army of Navy for their actual use or issue.

I: W/N the merchants selling goods to the Exchange are exempt from sales tax. NO

R: The tax exemption covers those goods that are sold directly to the US Army or Navy for their actual use or issue. In this case, the goods are sold to the Exchange for resale to individuals belonging to the Army or Navy, and not to the Army or Navy itself. Hence, they do not fall within the exemption.

The rule is that without Congressional consent, no Federal agency or instrumentality can be taxed by state authority. However, only those agencies through which the Federal Government immediately and directly exercises its sovereign powers are immune from the taxing power of the states. The reason upon which the rule rests must be the guiding principle to control its operation. The limitations upon the taxing power of the state must receive a practical construction which does not seriously impair the taxing power of the Government imposing the tax. The effect of the tax upon the functions of the Government and the nature of the governmental agency determine finally the extent of the exemption. In this case, the tax laid upon Philippine merchants who sell to the Exchange does not interfere with the supremacy of the US Government or with the operations of its instrumentality the US Army, to such an extent or in such a manner as to render the tax illegal. The tax does not deprive the Army of the power to serve the Government or hinder the efficient exercise of its power.

CIR v. Marubeni Corporation Marubeni was a Japanese corporation engaged in the import and export, trading, and construction business. It completed two contracts in 1984, the income from which it did not declare.

One of the contracts was with NDC in connection with the construction of a wharf/port complex in Leyte. The other contract was with the Philippine Phosphate Fertilizer Corp (Philfos) for the construction of an ammonia storage complex also in Leyte.

The CIR then made an assessment on Marubeni's deficiency taxes. It found that the NDC and Philpos contracts were made on a turn-key basis (a job in which the contractor agrees to complete the work of building and installation to the point of readiness or occupancy; in other words, the products are brought to the client complete and ready for use) amounting to about P960M+.

The two contracts were divided into two parts the offshore portion and the onshore portion. All materials and equipment in the contract under the offshore portion were manufactured and completed in Japan. After manufacture, these were transported to Leyte and installed to the pier with the use of bolts.

CIR found that Marubeni was liable for contractor's tax on the offshore portion.

Marubeni filed a petition with the CTA, arguing that the income derived from the offshore portion should be exempt from tax since it was derived outside of the Philippine jurisdiction. I: W/N income of Marubeni is taxable even if it claims that it was earned outside of the Philippines. NO, Marubeni is NOT liable for the contractors tax. R: A contractors tax is in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale of products. It is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district. In this case, the ship loaders, boats and mobile equipment used in the construction projects were all designed, engineered and fabricated in Japan. They were merely shipped to Leyte and assembled there. While the construction and installation work were completed within the Philippines, some pieces of equipment and supplies were completely designed and engineered in Japan. Since these services were rendered outside the taxing jurisdiction of the Philippines, they are therefore not subject to the contractors tax.Reagan v. CIR: Territorial Jurisdiction

Reagan, an American citizen and an employee Bendix Aviation Corporation, which provides technical assistance to the US Air Force, was assigned at Clark Air Base. He imported a tax-free 1960 Cadillac car.

After a few months, he asked his Base Commander at the Clark Air Base for a permit to sell the car which was granted provided that the sale should be made to a member of the US Armed Forces or a US citizen employed in the US military base in the Philippines. He then sold the car to , Jr. who was a member of the US Marine Corps in Cavite. Johnson, Jr. then sold the car to Meneses.

The CIR assessed him and he paid the income tax on the amount realized from the sale. After paying the income tax, he sought a refund from CIR claiming that he is exempt. While the action was pending, he filed the case with the CTA seeking the recovery of what he paid plus the legal rate of interest.

Reagan is imputing that the Clark Air Force is foreign soil or territory and thus is beyond the governments jurisdictional power to tax. His ground is based upon an obiter dictum in a 1962 decision

I: W/N the sale is exempt from income tax. NO

R: The sale is not exempt from income tax because it took place within Philippine territory thus within the governments jurisdictional power to tax.

Clark Air Force Base is not a foreign soil or territory for purpose of income tax legislation. There is nothing in the Military Bases Agreement that lends support to such assertion. It has not become foreign soil or territory. The Philippines jurisdictional rights therein, certainly not excluding the power to tax, have been preserved. The Phils being independent and sovereign, its authority may be exercised over its entire domain. There is no portion thereof that is beyond its power. Its laws govern therein, and everyone to whom it applies must submit to its terms. The ground occupied by an embassy is not in fact the territory of the foreign State to which the premises belong through possession or ownership. The lawfulness or unlawfulness of acts there committed is determined by the territorial sovereign.

A state is not precluded from allowing another power to participate in the exercise of jurisdictional right over certain portions of its territory. If it does so, it does not follow that such areas become impressed w/ alien character. They retain their status as native soil. They are still subject to its authority. Itts jurisdiction may be diminished, but it does not disappear. So it is with the bases under lease to the American armed forces by virtue of the Military Bases Agreement of 1947. They are not and cannot be foreign territory.

Tiu v. CA: Equal Protection of the Laws

Congress passed RA 7227 which created the Subic Special Economic Zone, granting tax and duty incentives (tax and duty-free importations of raw materials, capital and equipment) to businesses and residents within the area encompassed by the zone.

The law provides that no local and national taxes shall be imposed within the zone. In lieu of taxes, 3% of the gross income of enterprises operating within the zone shall be remitted to the National Government, 1% to the local government units, and 1% to a development fund to be utilized for the development of municipalities outside Olangapo and Subic.

Pres. Ramos later issued an EO specifying a secured area area within the zone in which the privileges were operative.

EO97 tax and duty-free importations will only apply to raw materials, capital goods and equipment brought in by business enterprises into the SSEZ.

Except for import tax and duties, all business are required to pay the specified taxes in Section 12(c) of RA7227.

EO97-A ( the tax incentives are only applicable to business enterprises and individuals residing within the secured area.

Petitioners outside the secured area challenged the constitutionality of this EO for allegedly being violative of their right to equal protection of the laws.

They assert that the SSEZ encompasses (1) the City of Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerly occupied by the Subic Naval Base. However, EO 97-A, according to them, narrowed down the area within which the special privileges granted to the entire zone would apply to the present fenced-in former Subic Naval Base only. It has hereby excluded the residents of the first two components of the zone from enjoying the benefits granted by the law.

I: W/N the EO confining the application of the privileges under RA 7227 within the secured area and excluding the residents of the zone outside the secured area violates the equal protection clause. NO. R: There are real and substantive distinctions between the circumstances obtaining inside and outside the Subic Naval base, thereby justifying avalid and reasonable classification.

For a valid classification, the following requisites must be present:

1. it must rest on substantial differences;

2. must be germane to the purpose of the law;

3. must not be limited to existing conditions only; and

4. must apply equally to all members of the same class.

In this case, the purpose of the law is to accelerate the conversion of military reservations into productive areas (economic or industrial areas) . Thus, the lands covered under the Military Bases Agreement are its object.

To achieve purpose, Congress deemed it necessary to extend economic incentives to attract and encourage investors. It was thus reasonable for the President to have delimited the application of some incentives to the confines of the former Subic military base, since it is this specific area which the government intends to transform and develop into a self-sustaining industrial and economic zone, particularly for the use of big foreign and local investors to use as operational bases for their businesses and industries. These big investors possess the capital necessary to spur economic growth and generate employment opportunities.

There are substantial differences between the big investors who are being lured to establish and operate their industries in the so-called secured area and the present business operators outside the area. Big investors lured into secured areasPresent biz operators outside the are

-billion-peso investments & thousand of new jobs

-national economic impact

--no such magnitude

-only local economic impact

-biz activities outside secured areas are not likely to have any impact in achieving purpose of law which is to turn former military base to productive use for the benefit of the Phil economy

There is, then, hardly any reasonable basis to extend to them the benefits and incentives accorded in RA 7227John Hay Peoples Alternative Coalition v. Lim

RA No. 7227 created the Bases Conversion and Development Authority (BCDA), which also created the Subic Special Economic Zone (Subic SEZ). Aside from granting incentives to Subic SEZ, RA 7227 also granted the President is an express authority to create other SEZs in the areas covered respectively by the Clark military reservation, the Wallace Air Station in San Fernando, La Union, and Camp John Hay through executive proclamations.

BCDA entered into a MOA and Escrow Agreement with TUNTEX and ASIAWORLD, private corporations under the laws of the British Virgin Islands, preparatory to the formation of a joint venture for the development of Poro Point La Union and Camp John Hay as premier tourist destinations and recreation centers.

BCDA, TUNTEX and ASIAWORLD executed a JVA to put up the Baguio International Development and Management Corporation which would lease areas within Camp John Hay and Poro Point for the attainment of the tourist and recreation spots in La Union and Camp John Hay.

President Ramos issued Proclamation No. 420 which established a SEZ on a portion of Camp John Hay. 2nd sentence of Section 3 of said Proclamation provided for national and local tax exemption within and graned other economic incentives to the John Hay Special Economic Zone.

Section 3: Investment Climate in John Hay Special Economic Zone.- Pursuant to Section 5(m) and Section 15 of RA No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies, rules, and regulations governing the zone, including investment incentives, in consultation with pertinent government departments. Among others, the zone shall have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be enacted.

Petitioners filed this case to enjoin the respondents from implementing Proc. 420. is unconstitutional on grounds of:

For being illegal and invalid in so far as it grants tax exemptions thus amounting to unconstitutional exercise of by the President of power granted only to legislature

Limits powers and interferes with the autonomy of the city

Violates rule that all taxes should be uniform and equitable

I: W/N Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other economic incentives to the John Hay Special Economic Zone. NO, 2nd sentence, Section 3 of said proclamation is unconstitutional.

W/N Proclamation No. 420 is constitutional for limiting or interfering with the local autonomy of Baguio City. YES

R: The 2nd Sentence of SECTION 3 of Proclamation No. 420 is hereby declared NULL and VOID and is accordingly declared of no legal force and effect. Public respondents are hereby enjoined from implementing the aforesaid void provision. Proclamation No. 420, without the invalidated portion, remains valid and effective.

Under Section 12 of RA No. 7227 it is clear that ONLY THE SUBIC SEZ which was granted by Congress with tax exemption, investment incentives and the like. THERE IS NO EXPRESS EXTENSION OF THE SAID PROVISION IN PRESIDENTIAL PROCLAMATION No. 420. (Section 12 kept mentioning Subic Special Economic Zone, specifically) Also found in the deliberations of the Senate, a confirmation of the exclusivity of the tax and investment privileges to Subic SEZ. Senator Angara: The Gentleman is absolutely correct. Mr. President. SO WE MUST CONFINE THESE POLICIES ONLY TO SUBIC. It is the legislature, unless limited by a provision of the state constitution that has full power to exempt any person, corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than the Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes. The challenged grant of tax exemption must have concurrence of a majority of all members of Congress. In same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon.

Tax exemption cannot be implied as it must be categorically and un mistakably expressed if it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to Subic SEZ, it would have so expressly provided in RA 7227.

BCDA, under R.A 7227, is expressly entrusted with broad rights of ownership and administration over Camp John Hay, as the governing agency of the John Hay SEZ.

COCONUT OIL REFINERS ASSOCIATION INC. V. BCDA

RA 7227 was enacted providing for the sound and balanced conversion of the Clark and Subic military reservations and their extensions into alternative productive uses in the form of special economic zones.

President Ramos issued EO 80 which declared that Clark (CSEZ) shall have all the applicable incentives granted to the Subic Special Economic and Free Port Zone (SSEZ) under RA 7227.

Petitioners claim that the said E.O as well as RA 7227 are replete with constitutional infirmities and must be declared invalid and void.

Petitioner assail:

EO 80 and BCDA Board Resolution: allowing the tax and duty-free sale at retail of consumer goods imported via clark for consumption outside CSEZ.

EO 97, EO 97-A: granting $100 monthly and $200 yearly tax-free shopping privileges to SSEZ residents living outside secured area of SSEZ and to Filipinos aged 15 and over residing outside SSEZ

Petitioners argue that the Executive Department, by allowing thru questioned issuances the setting up of tax and duty free shops and the removal of consumer ggoods and items from the zones without payment of correspondning duties and taxes arbitrarily provided additional exemptions to the limitations imposed by RA 7227.

I: (other issues: equal protection clause, preferential use of Filipino labor, prohibition against unfair competition)

W/N assailed issuances amounts to violation of the rule on separation of powers being executive legislation.

R: Petitioners claim that the wording of RA 7227 clearly limits the grant of tax incentives to the importation of raw materials and capital equipment only, hence they claim that assailed issuances constitute executive legislation for invalidly granting tax incentives in importation of consumer goods. The court however said that to limit the tax-free importation privilege of enterprises to those located inside the special zone only to raw materials clearly runs counter to the intention of the legislature to create a free port where free flow of goods or capital within, into and out of the zones is insured.

The records of the Senate containing the discussion of the concept of SEZ in Sec 12a RA 7227 show the legislative intent that consumer goods entering the SSEZ which satisfy the needs of the zone and are consumed there are not subject to duties and taxes in accordance with Philippine laws. According to Senator Guingona: The SEZ could embrace the needs of tourism, servicing, financing and other investment aspects.

However with regard to the executive order issued by President Ramos concerning Clark as being a SEZ (and thus enjoy tax exemptions and incentives) the court declared that such was an invalid exercise of executive legislation. As was decided in the case of Camp John Jay, wherein the court held that John Hay was not granted any tax exemption as it was not anywhere stated in the law. As in this case, RA 7227 expressly provides for the grant of incentives to the SSEZ it fails to make any similar grant however to the other economic zones including Clark. Tax and duty free incentives being in the nature of tax exemptions the basis thereof should be categorically and unmistakably expressed from the language of the statute.

Province of Abra v Hernando

The Roman Catholic Bishop of Bangued wanted to be exempted from payment of real estate tax.

He filed an action for declaratory relief in the CFI of Abra.

The CFI rendered a summary judgment granting the exemption.

The Province of Abra filed an action for certiorari against the CFI on the ground that it granted the action for declaratory relief filed by the Roman Catholic Bishop without allowing the Province to answer and without hearing, in violation of its right to due process.

It also alleged that the judge (Hernando) failed to abide PD No. 464 which states that, No court shall entertain any suit ASSAILING the validity of tax until the taxpayer pays under protest the tax assessed against him.. nor shall any court declare any portion of the tax assessed INVALID except if the taxpayer shall pay the just amount of tax determined by the court.

I: W/n the judgment of the court granting the exemption to the Roman Catholic Bishop of Bangued is valid

R: NO, it is invalid

In order to exempt religious institutions from the payment of real estate taxes, the property must be used exclusively, actually, and directly for religious purposes. Thus, To be exempted from realty tax, there must be proof of ACTUAL and DIRECT use of the property for religious or charitable purposes.

In this case, the right of the Province of Abra to procedural due process was violated by the summary judgment granting the exemption.

Instead of accepting the bare allegation of the bishop that the property was being used exclusively, directly, and actually for public purposes, the judge should have first required proof of these allegations.

Tolentino v. Sec. of Finance

Several parties filed complaints in the SC questioning the legality of Expanded VAT law (RA 7716), which sought to widen the tax base of the existing VAT system

(*VAT: a tax levied on the sale, barter or exchange of goods and properties AS WELL AS as on the sale or exchange of services; or SIMPLY tax on spending / consumption):

1) The Philippine Press Institute contends that by removing VAT exemption from the press while maintaining those granted to others, the EVAT Law discriminates against the press and violates the freedom of the press. R: Since the law granted the press a privilege, the law could take back the privilege anytime WITHOUT offense to the Constitution.

The State, by granting exemptions, does NOT forever waive the exercise of its sovereign prerogative. In withdrawing the exemption, the law merely subjects the press to the same tax burden to which other businesses have already been subject.

The case of Grosjean v. American Press Co. cited by the PPI is different because in that case, the tax was found to be discriminatory because it was imposed only on newspapers whose weekly circulation was over P20k. These papers were critical of a certain senator who controlled the state legislature. The censorial motivation of the law was thus evident. HOWEVER, in this case, the motivation was not to censor but merely to raise revenues.

What the legislature cannot impose upon the press is a license tax, which is mainly for regulation AND is unconstitutional because it lays PRIOR RESTRAINT on the exercise of a right.

In this case, the VAT is not a license tax because it is not a tax on the exercise of a privilege or of a constitutional right. It is imposed on the sale of goods purely for revenue purposes.

2) Philippine Bible Society claims that the imposition of VAT on the sales of its bibles INFRINGES on religious freedom because the tax INCREASES the price of the bibles, while REDUCING the volume of sales.

It also claims exemption from the registration fee of P1k.

R: The resulting burden on the exercise of religious freedom is so INCIDENTAL as to make it difficult to differentiate it from any other economic imposition that might make the right to disseminate religious doctrines costly.

To follow PBS argument of increasing the tax on the sale of vestments would be to lay an impermissible burden on the right of the preacher to make a sermon.

The registration fee is really just to pay for the expenses of registration and enforcement of the provisions of the law. Even if PBS is excused from paying taxes on those bibles that it distributes for free, it still has to pay the registration fee since it also engages in the sale of bibles.

3. CREBA claims that the law:

a) impairs the obligations of contracts because the application of the tax to existing contracts of the sale of real property by installment would result in substantial increases in monthly amortizations, which the buyer did not anticipate at the time he entered into the contract.

b) violates equal protection since the law exempts low-cost housing from VAT but NOT middle-class housing.

c) Being an indirect, regressive tax, VAT violates the constitutional mandate to provide a progressive system of taxation.

R:

a) VAT does NOT violate the non-impairment clause because the obligation of contracts CANNOT defeat the authority of the government to tax by virtue of its sovereignty.

b) Neither did it violate EPC because there was a substantial distinction between the homeless poor and the middle class. The middle class can afford to rent houses while the homeless poor cannot.

c) As to it being a regressive tax, the Constitution does not prohibit regressive taxes. What it simply provides is that Congress shall evolve a progressive system of taxation, which means that direct taxes are to be preferred and indirect taxes minimized.

VAT provides exemptions in favor of basic goods utilized by the lower income brackets and its burden actually falls more on those goods that consumers from the higher income bracket buy.

Therefore, the tax is not repugnant to the Constitution.

ABAKADA v Ermita

R.A. 9337 / the EVAT Law was enacted in May 2005. This law:

1) authorized the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12% effective January 1, 2006, if two cond