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Taxation 1

June 18, 2013

Taxation has been defined as the power of the sovereign toimpose burdens or charges upon persons, properties or propertyrights for the use and support of the government for it to be ableto discharge.

Taxation is also the power to create revenue to defray necessarygovernmental expenses.

Attributes of Taxation

1. I t is an inherent power of the sovereign –it exists andindependent from the Constitution; it exist independent fromany act of legislation. In other words, taxation exists when thereis government or of a state. Taxation as a power emanates from

the people.

2. It is legislative in character- because this power is given to thelegislature or the law-making body. WHY? Because from the verybeginning, taxation is a power of the sovereign ad who is thesovereign? The people. And when the people exercise this powerit is done through their representatives and who are therepresentatives of the people? You have the legislature.

3. It is subject to Inherent and Constitutional Limitations- Sincethe power of taxation is so comprehensive and unlimited –Thepower to tax involves the power to destroy-this power is socomprehensive in scope therefore, it should be subjected tolimitations. These limitations are divided into two: InherentLimitations and Constitutional Limitations.

Then taxation the power to impose burdens or charges uponpersons, properties, or property rights for the use and support of the government to support and to enable the government todischarge its functions. This tells us the purpose of taxation. Thepurpose of taxation is that these charges and burdens that willbe imposed upon the subjects of the tax so the money that willbe raised from taxation will be used for the support of the

government. Therefore, REVENUE is the PRINICIPAL OBJECTIVEOF TAXATION.

There are three inherent powers of the State:

1. Police Power

2. Eminent Domain

3. Power to Tax.

SOURCES OF REVENUE OF THE GOVERNMENT- Charges,taxes and fees.

Theory of Taxation: Taxes proceed from the theory of theexistence of the government is a necessity. This is the principlewhich states that TAXES ARE THE LIFEBLOOD OF THEGOVERNMENT. That the existence of the government is a

necessity because the government will not be able to dischargeits functions without taxes (NECESSITY THEORY.)

The other basis would be the PROTECTION-BENEFIT PRINCIPLE(Basis of taxation) - The reciprocal obligation or the symbioticobligation between the State and the citizens. The obligation of the State is to extend protection to the citizens and on the otherhand the obligation of the citizens is to support the governmentby paying their taxes.

Under this principle, if a citizen pays more taxes, is there an

obligation on the part of the State to afford more protection tothe said citizen? No. Whether you pay more or less thegovernment shall give similar protection and benefits among itscitizens. This is based on the other principle of taxation which isthe ABILITY TO PAY.

Aspects or Phases of Taxation:

1. Levying or the assessment stage- It is the exercise of thepower of taxation through its legislative body. The Congressdoes not implement the tax law.



2. Collection and payment of taxes-TAX ADMINISTRATION-Executive in character. The executive shall implement the taxlaws.

What is the extent of the Power of the Law-making body withregards to taxation?

1. Determination of what would be the subject of tax.

2. Determination of the purpose for the said tax so long as it isfor public purpose.

3. Determination of the tax amount or rate.

4. Determination of the manner, the means agencies of thecollection of tax.

Can one go to the Court and question the motive of the

legislature on the levy?

In one case, a certain person filed before the RTC of Manilaquestioning on the imposition of tax under the NIRC on the jewellery industry. Because according to him the jewellers from Thailand, Vietnam and other Asian countries are taxed less howcome they are taxed with a higher rate. Going back to thequestion, can one go to the Court and question the motive of thelegislature on the levy? The answer is NO! Because the wisdomupon determining the subject of tax is upon the legislature for aslong as it is for public purpose.

However, if the question involves the inherent or constitutionallimitations of the tax law then you go to the Court.

“Power to Tax involves the Power to Destroy”-This principlecame out because of the extent of the power of the State whichis very comprehensive and unlimited BUT the said principle wasdebunked when another principle came out- “Power to tax is notthe Power to Destroy while the Supreme Court sits.”

Non-Revenue Objectives of Taxation:

1. Taxation can be used as a device for Regulation- Taxationmay go hand with hand with the police power. Police powercould be used to exercise the power of taxation.

****Lutz vs Araneta- It involves the imposition of CA 567 or theSugar Adjustment Act. It was questioned how come such act wasonly imposed upon the sugar industry when the purpose of

taxation is public purpose. According the SC, the SugarAdjustment Act , the tax which will be collected is a tax leviedwith a regulatory purpose, to provide means for therehabilitation and stabilization of the threatened sugar industry.In other words, the act is primarily an exercise of the policepower. The protection and promotion of the sugar industry is amatter of public concern, it follows that the Legislature maydetermine within reasonable bounds what is necessary for itsprotection and expedient for its promotion. Here, the legislativediscretion must be allowed fully play, subject only to the test of reasonableness; and it is not contended that the meansprovided in section 6 of the law (above quoted) bear no relation

to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reasonis seen why the state may not levy taxes to raise funds for theirprosecution and attainment. Taxation may be made theimplement of the state's police power. So CA 567 is a taxmeasure in aid and in support for the Sugar Industry. So if a taxlaw is addressed only for the benefit of a particular industry itdoes not mean that it will violate public purpose because taxpower may go hand with hand with police power.

****Tio vs ERB- This is prior to the Optical Media Board, thevideo industry was taxed under PD 1987 or An Act Creating theVideogram Regulatory Board" with broad powers to regulate andsupervise the videogram industry. So it was asked in that casewhether taxing the video industry was a tax or a regulatorymeasure. The SC said that taxing the video industry is both a taxand a regulatory and revenue measure. Likewise, the impositionis also for public purpose. The taxation the video industry is toregulate and rationalize the uncontrolled distribution of videograms. PD 1987 is not only a regulatory measure but also arevenue measure prompted to realize earnings from videogramsestablishment around 600 million per annum which was notsubject to tax which deprived the government of additionalsources of revenue. It is an end-user‘s tax imposed on retailers



for every videogram they make available for public viewing. Itwas imposed due to rampant piracy, violations of IPs andproliferation of porno tapes.

2. The tax maybe used to strengthen industries or enterprises –providing incentives. Remember that taxation is not just aboutimposing taxes but also it is about providing tax exemptions, tax

deductions. These are acts of taxation.

3. Taxes on imports may be increased to protect local industriesagainst foreign competition or decreased to encourage foreigntrade- The tariff on Customs Code, when an imported article isbrought in the country and these articles are sold in thePhilippines for a cheaper price and it affects the local industry-then the DTI or DA will impose an ANTI-DUMPING DUTY whereasif the imported articles were made by industries subsidized bytheir government and were brought in Philippines, the DTI or DAmay imposed a SPECIAL CUSTOMS DUTY upon the said articles. To protect our local industries. SAFEGUARD if the articles are notsubsidized by the government where they are

made likewise such articles do not violate the anti-dumping lawbut there is a heavy importation of the said articles then DTI orDA will imposed a SAFEGUARD MEASURE.

4. It may be used as a bargaining tool

5. It may be used to halt inflation or lowered in periods of slumpto expand business and ward off depression.

6. To reduce inequalities in wealth and incomes.

May the power of taxation be used as an implement of thepower of eminent domain?

****CIR vs Central Luzon Drug Corp. - Where the senior citizenslaw. The senior citizen’s law grants discount of 20% so when thesenior citizen pays, he or she only pays the 80% so this law waschallenged. So the question now is how will the pharmaciesrecover the discount? By the reason of the discount there is thetaking of one’s property. In eminent domain, it is required that

when there is a lawful taking of property there should be just

compensation. So paano na yung just compensation ng drugstore? So now they will be given what we call as TAX CREDIT inother words yung 20 pesos ng drug store ay puwede niyanggamitin as a tax credit against its tax dues. So that is the justcompensation. So this case shows that power of eminent domaincan go hand with hand with tax power whereby there is taking of property due to that 20% discount and the just compensation is

given through tax credit. Under the amendment the discountnow is no longer use as tax credit but as tax deductions.

Principles or Cannons of a Sound Tax System

1. There must be fiscal adequacy- Sources of revenue taken as awhole should be sufficient to meet the varying levels of expenditures of the government regardless of businessconditions or problems of economic adjustments. In short, thetax system within a state is one where the state has sufficientresources of revenue , how is the sources of revenuedetermined? By the sufficiency of tax laws to meet theexpenditures of the government. The expenditures of thegovernment may expand or contract under economic conditionsof the state despite the economic conditions of the state therevenue of the state should expand and contract to the needs of the government. In short, if there is a shortfall on the revenue of the government it is not wise to go directly to the Congress andask them enact laws which will raise the tax rates (Last resort).Because your sources of revenue requires for the purposes of fiscal adequacy should be able and contract to the levels of expenditures of the government regardless the economicconditions.

****Chavez vs Ongpin- After EDSA, Cory Aquino came out withthis EO 73 wherein it authorizes local government units to revisereal property assessments for the purposes of real propertytaxation because the valuations used by the LGUs were 1978valuations and it was 1986 so purposes for fiscal adequacy LGUswere not able to update their valuations so Cory came out withsuch EO 73. It was challenged as unconstitutional. The SCupheld that EO 73 is Constitutional- Without Executive Order No.73, the basis for collection of real property taxes win still be the1978 revision of property values. Certainly, to continuecollecting real property taxes based on valuations arrived at

several years ago, in disregard of the increases in the value of



real properties that have occurred since then, is not inconsonance with a sound tax system.

Fiscal adequacy, which is one of the characteristics of a soundtax system, requires that sources of revenues must be adequateto meet government expenditures and their variations.

****ABAKADA vs Ermita-This is in connection with the impositionof VAT. First it was 10% then later it became 12% in 2005 underRA 9337. RA 9337 was challenged for being unconstitutional forviolation of due process etc. One of the issues raised there wasthe application of fiscal adequacy. One of the issues there is thevalidity of the imposition of 12% VAT rate being constitutional-raising the VAT from 10 to 12 % is not valid thereforeunconstitutional. The SC said that increasing the VAT from 10 to12% is the demand of the principle of fiscal adequacy. Sourcesof revenues must be adequate to meet the governmentexpenditures. There is a need of proof to show that there isindeed violation of due process and equal protection. The Courtwill not interfere absent a showing of arbitrariness,unreasonableness and discrimination. RA 9337 is equitable anduniformed within a particular class. The VAT is the anti-thesis of progressive taxation by its very nature it is regressive.Progressive taxation has no relation with the VAT system as theVAT is paid by the consumers or the business regardless of itsnature. The Court could not strike down a law simply because of its looks.

2. There must be Theoretical Justice-Taxes levied must be basedon one’s ability to pay.

3. Administrative Feasibility- It tells us that taxes being burdensthat system of assessment of where you pay your tax etc. mustbe CONVENIENT TO THE TAXPAYER. It should also be just and itmust be uniform in enforcement by governmental officials etc.

TAX- The burdens or charges imposed by the State. It is anenforced proportional burden from person or property levied bythe law-making body of the Sate by virtue of its sovereignty forthe support of the government and for public needs.

Characteristics of Tax:

1. It is an enforced contribution

2. It is generally payable in money

3. It is proportionate in character

4. It is levied upon person, property or property rights.

5. It is levied by the law-making body

6. It is levied by the State which has jurisdiction

7. It is levied for public purpose.

Classifications:

a. Subject-matter

1. Poll Tax/ Personal Tax

2. Property Tax

3. Excise Tax

b. Who bears the burden

1. Direct Tax-Whereby the statutory taxpayer pays the tax andshoulders burden of tax like income tax etc.

2. Indirect Tax- Where the statutory tax payer, the person who isliable to pay the tax s allowed to pass or shift the burden of taxto another like VAT

Tax – June 19, 2013

Among others the important distinctions as of classes:

* As to who bears the burden:

(a) Direct



(b) Indirect

* As to determination of amount:

(a) Specific – based on a certain standard of rate ormeasurement. Like in the case of liquors/alcohol products.

(b) Ad Valorem – based on value

* As to purpose:

(a) General

(b) Special/ Regulatory

* As to scope:

(a) National

(b) Municipal/ Local

* As to rates:

(a) Progressive

(b) Regressive

(c) Proportional

* As to the basis of ability to pay:

(a) Progressive tax

(b) Regressive tax

System of Taxation

Progressive system of taxation it is different from a progressivetax or a progressive rate and when we talk about a regressive

system it is also different from a regressive tax or a regressiverate because what we are talking about is a system of taxation.

A progressive system is one where the system of taxation is thatit has more direct taxes than indirect taxes. Most of the taxes inthe system are direct than indirect.

A regressive system is one where you have more indirect taxesthan direct taxes.

Tax as distinguished from other terms:

TOLL - different from a Tax (enforced burden or contributionimposed by the State)

* The reconsideration you pay for the use of property. When youpay a toll it does not mean you are paying a tax.

PENALTY – where one is made to pay a penalty it does not havea similar concept as payment of the tax.

A penalty is one that is imposed for violation of a law or a certainregulation within which you are made to pay a penalty whetherthe penalty would take into a form of imprisonment or paymentof a fine or both. It is an imposition of a certain sanction imposedby law or by a regulation. While a tax does not operate as apenalty, it is an exaction or a burden but it is not an impositionof penalty – it is an enforced contribution.

SPECIAL ASSESSMENT – operates different from a tax; “speciallevy”/ “special assessment tax” are terms not actually in itstechnical sense a tax.

A special assessment or in local taxation they call it “speciallevy” imposed by LGUs is a method or a mode of recovery orreimbursement on the part of the government when governmentwould introduce infrastructure development or public worksprojects. Example of that is that in a far-flung place, governmentwould introduce a bridge or a road which before that place couldnot be reached through a mode of transportation then thegovernment now constructed public works project or

infrastructure development. Now as a result of that



development, property owners in that area were benefited bythat project. The amount spent by the government for thatproject is recovered through the process or the method of theimposition of a special assessment or a special levy – forpurposes that the government would be able to recover the costof the investment or the cost of the project. The governmentnow after completing the project would impose what we call as a

special assessment.

Special assessment is therefore imposed to those real propertyowners who will be benefited by the project. If you are notbenefited by the project, the assessment would not apply onyou. Another characteristic of special assessment – there is aperiod within which to collect; normally a period of 10 yearswhile tax – the imposition, the assessment or the collection of the tax continues until the tax would be repealed or the rate/ lawbe amended. For as long as the tax law or the tax is thereenforced then the collection and the payment continues but notin the case of a special assessment - there is a limit as to time, it

is only imposed only upon the land and to the property ownersbenefited by the improvement.

DEBT – arises from a contract (express or implied) while tax iswritten by law

* Non-payment of a debt, no person is imprisoned but theperson may be imprisoned for non-payment of tax except thepoll tax/ cedula/ residence tax

* As a matter of set-off or compensation: Debt may be subject to

set-off or compensation but a tax cannot be subject to set-off orcompensation because there is no debtor-creditor relationshipbetween the taxpayer and the State.

* Republic vs. Mambulao (4 S 622): Mambulao Lumber operatesa logging concession which under its concession was subject toforestry charges on account of the business it was engaged inbeing a logging operator. Part of its obligation as a loggingconcessionaire is to do reforestation and the cost of reforestation could be reimbursed against the government. Youhave Mambulao Lumber having obligations or taxes by way of forestry charges on account of its activity as a logging

concessionaire. On the other hand, it has a claim against thegovernment for reimbursement on the cost of the reforestation ithas been doing on its logging concession. So

Mambulao now asks if they could have a set-off orcompensation. The SC said that there can be no set-off orcompensation because the forestry charges/ taxes are not

subject to set off or compensation. There is no debtor-creditorrelationship between the taxpayer and the government. SCdisallowed set-off and compensation. This ruling has beenreiterated in the case of Rep vs. Erita(?) (172 s 63) and Franciavs IAC (162 s 753).

* In the case of Francia vs IAC, Francia’s property was subject toexpropriation proceedings by the City of Pasay and Francia hadobligations by way of real property taxes. Since she has a claimover the government of just compensation on account of expropriation proceedings. Then she now asks for set-off orcompensation. The SC did not allow set-off or compensation forthe same principle that taxes cannot be subject to set-off orcompensation.

* Later, this ruling was reiterated in the case of Caltex Phil vs.COA (208 S 727), San Carlos Milling vs CIR (228 S 135), PhilexMining vs CIR (294 S 687).

* In the case of Philex Mining vs CIR, Philex filed an applicationfor tax refund or tax credit because it overpaid for taxes- itasked for a refund or tax credit. Philex also had obligations forthe taxes on its mining activity. Philex asks to set-off the refund

claim and the obligations for taxes since both are taxes. The SCruled that even in a tax refund claim there is still no set-off orcompensation.

* Have that application for tax refund/ issuance of tax creditcertificate been approved, can you now ask for a set-off orcompensation? It could be YES because at that time (Philex) itwas a pending application but if it had been approved then itcan now invoke set-off or compensation.

* The only instance where the court allowed set-off orcompensation is in the case of Domingo vs. Garlitos (8 S 443),



the estate had a claim for unpaid services by the estate of riceand there was a liability or a tax to be paid on the part of thegovernment. Considering that the claim had already beenapproved or money was already appropriated to pay the estatethen the court allowed set-off or compensation because theclaim of the estate for the payment of the services was alreadybeen approved and money was already appropriated and set

aside.

* When the claim of the government or taxes and the taxpayerfor services rendered had already become due and demandableas well as fully liquidated then compensation takes place byoperation of law in accordance with Art 1279 and Art 1290 of theCivil Code. Both debts are extinguished in the concurrentamounts.

LICENSE AND FEES – taxes arise from the exercise of the taxingpower while license fees arise from the exercise of police power

* Purpose: Taxes are for revenue; license fees are for regulation

* License fees cannot exceed the reasonable cost of regulation;taxes are not so limited

* In other words, to make a burden or a charge or an impositionor an exaction in the nature of a license fee the amount that isto be collected should be a reasonable amount to cover the costof regulation, inspection and police surveillance because if yougo higher than that then it is not anymore a license fee becausethe amount of the license fee is regulated, must be a reasonable

cost. In the case of taxes, the legislative body has the discretionin determining the amount of the rate of the tax.

* License fees can only be imposed on legal businesses oractivities; taxes can be imposed whether you are on a legal oran illegal businesses or activities. License fees are imposed tomake your business activity legal or because the purpose is toregulate so the license fees are imposed on legal activities butfor purposes of taxation whether you are engaged in kidnapping,ransom or a drug lord - you have the obligation to pay taxesbecause taxes are imposed either on legal or illegal activities.

* Failure to pay a license fee makes the business illegal butfailure to pay a tax does not make the business illegal becausewhether you are engaged in a lawful or unlawful business youare in an obligation to pay taxes.

(26:35) Diyan ka na time magsimula manisan. J

What are the important distinctions between License Feeand Tax:

1. Determination as to the amount

a. License Fee- the restriction for the imposition of the licensefee is an amount that is reasonable to cover the cause of regulation. In the context of a license fee, there are 3 kinds of license fees:

3 Kinds of License Fees:

1. License Tax – this is purely a tax. The purpose is to raiserevenue. Example: motor vehicle registration fees. They arecalled fees but they are not in the nature of regulation or policepower but they are taxes.

2. License Fee to regulate a useful occupation – police power. The purpose is to regulate. The state is to observe that theamount of fees that is to be imposed for purposes of regulationshould be reasonable amount to cover the cost of inspection,surveillance or regulation.

3. License Fee to regulate a non-useful occupation – policepower. The purpose is to regulate. It could go over and abovethe requirement of reasonableness because the purpose of alicense fee to regulate a non-useful occupation is to discouragepeople from going into a non-useful occupation. The guideline asto the reasonable amount is no longer applicable. Such in thecase of:

Physical Therapists Organization vs. City of Manila (Aug. 30,1957)



P 100 license fee was questioned because it was too much.According to them, it was equivalent to an act of taxation. Theimposition of P 100 license fee for that profession, aside fromthe constitutional limitation on equality and due process, it wasmore of a nature of a tax than a license fee.

The Supreme Court said: NO, the license fee imposed here is not

to regulate a useful occupation but to regulate a non-usefuloccupation. If the purpose of the regulation is to regulate a non-useful occupation, then, you can go over and above thereasonable costs of regulation and occupation to discouragepeople from going into that kind of activity. The City of Manila ispreventing that the masseurs will be used as a house of prostitution. Under the General Welfare Clause, the LGU isauthorized to enact ordinances to provide for the health andsafety and to promote morality, peace and general welfare of itsinhabitants. The amount charged was properly considered indetermining whether it is a tax or an exercise of police power. The amount maybe so large as to itself show that the purpose is

to raise revenue and not to regulate. But in regard this matter,there is a marked distinction between the fees imposed onuseful and beneficial occupation which the sovereign wishes toregulate and strict to those which are inimical and dangerous topublic health, in which case, the state can impose fees so highwithout necessarily being a tax. The practice of aesthetic andunhygienic massage is not as useful occupation which willpromote and is conducive to public health and morals. There isno violation insofar as due process and equality of the treatmentof that imposition.

Q: How do you determine whether the exaction or imposition isan act of taxation or an act of regulation (License Fee)?

A: The determination is made by going into the primary purposeof the exaction. If the primary or principal purpose of theimposition is to regulate, while incidental revenue may begenerated from that imposition, it is still an exercise of policepower. Therefore, it is a license fee. Police power can go alongwith the power of taxation. When the principal purpose is toraise revenue, even if there is an incidental act of regulation, itis an act of taxation. What is to be determined is the principal orthe primary purpose of the imposition.

Such in the case of Progressive Dev’t Corp vs Quezon City 172SCRA 629

The QC enacted an ordinance imposing a 5% fee on rentals of lessees in QC as supervision fee. Progessive Dev’t Corporation,the operator of Farmers Market in Cubao, owned by theAranetas, questioned the validity of the ordinance, claiming that

the

exaction imposed by QC is not in the nature of a license fee buta tax, and therefore it is prohibited and the ordinance is null andvoid.

Issue: W/ the exaction imposed is a tax?

Held: the 5% supervision fee is for regulation and therefore not atax. The purpose of the exaction is clearly to supervise theoperation of a public market is an activity which involves public

interest. There is a reasonable relation between the feecollected and the probable cost of regulation because ordinarilythe higher the amount of stall rentals, the higher the aggregateof food stocks and related item sold in the privately ownedmarket and the higher the volume sold from that privatelyowned market, the greater the extent and frequency of inspection. Thus the supervision reasonably required is for thegeneral public.

Remember that in the principle that the amount for the purposesof license fee is that it should be a reasonable amount to coverthe cost of inspection and regulation. Is the 5% supervision fee a

reasonable amount to cover the cost of inspection andregulation? The SC said, YES, because if you pay more rent thenthe 5% of that is greater. If you pay a lesser rent, the 5% of thatis also less. Now, you are paying a higher rent because you areoccupying a bigger space and the bigger space you have themore food stocks you sell then the cost of inspection andregulation will be higher. Therefore, it is reasonable probablecost of the inspection, regulation and inspection. Therefore, it isa license fee.

In the cases of in Gaston v. Republic Planters Bank (158 SCRA626) and PAL v. Edu (164 SCRA 320), “An exaction maybe both



considered as a tax and a license fee. However the imposition isa tax if the primary purpose is for revenue and regulation ismerely incidental, but if the primary purpose is for regulationand the incidental revenue is also being paid then it is not a taxbut a license fee.”

Revenue- the funds generated by the government from taxes,

fees and charges.

Taxes at its generic sense, refers to internal revenue taxes andcustoms duties or tariff.

Taxation I

June 25, 2013

LIMITATIONS OF THE POWER OF TAXATION

Remember that the power of taxation or the power to tax isinherent in the sovereign. That this power is legislative incharacter but the power to tax is subject to limitations. Wherethe power to tax has a comprehensive scope and far-reachingstill having said the power to tax is subject to limitations. We canclassify these limitations into:

1. Inherent

2. Constitutional

So these limitations posed restrictions in the exercise of thatpower. So we go back to that principle that the power to taxinvolves the power to destroy. To safeguard the exercise of thispower it was subject to some limitations.

So what are the INHERENT LIMITATIONS?

1. You have the requirement of PUBLIC PURPOSE. This meansthat taxes must be levied for public purpose. So when the powerof taxation is exercised for public purpose. The requirement of public purpose is the heart and soul of the power to tax. So if the

power to tax is exercised for public purpose then whatever willbe enacted that would be the inherent limitation.

So what is this concept of public purpose? Anything that isrelated to governmental purpose; a purpose affecting theinhabitants of the state or taxing district as a community andnot merely as individuals. Because the concept of purpose is

very broad we could dissect this through decisions which woulddetermine whether or not such law complies with therequirement of public purpose.

***Lutz vs. Araneta-This case involves the enactment of CA 567or the Sugar Adjustment Act. The taxes imposed under CA 567are funds collected which are used for the rehabilitation andstabilization of the Sugar Industry. The purpose of the exactionis for public purpose. Although such law was enacted for theSugar industry it does not violate the idea of public purposebecause it was enacted for the rehabilitation and stabilization of the Sugar Industry which is also a national concern.

We also have the case of Gaston vs Republic Planters Bank.

***Gaston vs Republic Planters Bank- This time it is about thefee collected by the Planters Bank from the millers. And theissue that was brought is whether or not such fee is for publicpurpose. It is for public purpose since the stabilization fees inquestion are levied by the State upon sugar millers, planters andproducers for a special purpose — that of "financing the growthand development of the sugar industry and all its components,stabilization of the domestic market including the foreign market

the fact that the State has taken possession of moneys pursuantto law is sufficient to constitute them state funds, even thoughthey are held for a special purpose. The tax collected is not in apure exercise of the taxing power. It is levied with a regulatorypurpose, to provide means for the stabilization of the sugarindustry. The levy is primarily in the exercise of the police powerof the State.

***Citizens Alliance vs. ERB-The issue of this case is whether ornot the establishment of the Oil Price Stabilization Fund is forpublic purpose. And what is the justification for it? Theestablishment of the OPSF is within the pervasive power of the



government and its responsibility to secure to secure the of thecommunity. That comprehensive sovereign authority maydesignate . The reduction of the price of the petroleum, crude oiletc. clearly critical in importance considering among other thingsthe continuing dependence to such commodity as a publicpurpose. Now if it benefited the oil companies because of thecontinuing high level of dependence of the country to crude oil

then it does not mean that the OPSF was not created for publicpurpose (Please read the full text of the case because therecording for this part is not that audible) .

***COCOFED vs. PCGG- Are the COCO levy funds public funds? Inthis case, the PCGG wants to sequester the funds of COCOFEDbut the COCOFED contends that such funds they have wereprivate funds. So the issue here is whether or not the COCO levyfunds are public funds. The Nature of the COCO levy funds are inthe nature of public funds. The proper management of the COCOlevy funds are within the government they were collectedthrough the police and taxing power of the State. It cannot be

denied that it is the welfare of the entire nation which is one of the main factors of the imposition of the COCO levy fund. Itcould not be denied that the Coconut industry is one of themajor industries supporting the national economy. It is not onlya livelihood of a significant segment of the population but alsothe export earnings which is one of the imperatives of economicstability which clearly affects the public industry. The Court ruledthat the COCO levy funds are subject to sequestrationproceedings (Please read the full text of the case for moredetails on the ruling because the recording for this part is notthat audible).

***Planters Product Inc. vs. FertiPhil (548 SCRA 485)- PlantersProducts Inc. and FertiPhil are private corporations which importpesticides, fertilizers and

the like. Marcos came out with a Letter of Instruction directingthe FPA (Fertilizers and Pesticides Authority) to impose a 10-peso levy for every bag of fertilizer being sold. The proceeds of such levy will go to PPI. FertiPhil pays 10 pesos per bag for everysale of fertilizer. The FPA will give the amount (10 peso levy) toPPI. Now after the 1986 EDSA, FertiPhil now demanded thereturn of the amount it paid to PPI under the LOI but PPI refused.

So the issue here is whether or not the 10-peso levy under the

LOI was a valid tax collection? Remember now that you will goback to the basics that no matter whether the president has thetaxing power like in the case of Marcos it must be rememberedthat in the imposition of tax it should always be for publicpurpose. So the 10-peso levy was not a valid tax imposition norwas it regulatory (Please read the full text of the case for moredetails on the ruling because the recording for this part is not

that audible).

The Supreme Court said that public purpose is the heart of taxlaw. It is the consent that can be hammered to fit the modernstandards and it does not only pertain to purposes which aretraditionally considered as governmental functions such asconstruction of roads delivery of public services etc. but it alsoincludes social justice like for the use of the relocation of squatters, you have low-cost housing and urban housing as wellas agrarian reform. What constitutes public purpose is in thelight of the expansion of governmental functions. The meaningof public purpose continually evolves. The meaning continues to

expand. So it does not only refer to governmental functions. Sothis brings us to the case of Binay vs. Domingo.

***Binay vs. Domingo-Then the Mayor of Makati Jejomar Binayhas this pauper burial assistance kung saan kapag namatayanay covered ng burial assistance. This generous effort was putinto question. COA co-objected with such expenditure claimingthat it was an illegal exaction of government funds and this wasnot for public purpose. So the matter went to the SupremeCourt. Whether or not the pauper burial assistance program wasa valid program which is for public purpose. According to theSupreme Court it is a valid program within the scope of publicpurpose (Please read the full text for the reason of the ruling of SC) However, there is a caveat for the pauper burial assistanceprogram of Makati to be within the scope of public purpose-itshould only be applicable to the Municipality of Makati.

2. The second limitation is the NON-DELEGATION OF THELEGISLATIVE POWER OF TAXATION-In other words the power of taxation is exclusively legislative.

So remember that this limitation is subject to some exceptions:



a. Under the Constitution: Congress may expressly authorize thePresident to fix within specified

limits, and subject to such limitations and restrictions as it mayimpose, tariff rates, import and export quotas, tonnage andwharfage dues, and other duties or imposts within theframework of the national development program of the

Government (Sec. 28 (2), Article VI, 1987 Constitution)

***In the case of Garcia vs. Executive Secretary- CongressmanGarcia questioned the Executive Order on importation levyimplemented by its either President Ramos or Aquino. Garciaclaimed that the President has no taxing power because powerof taxation is legislative in character. So this was brought beforethe SC. The SC said that the President has taxing powers underArticle VI of the 1987 Constitution.

The Tariff and Customs Code also provides the mechanism of the exercise of this taxing power. Which is reflected by theflexible tariff laws. Under this the Congress may increase tariffsor decrease customs duties.

b. Another exception is in the case of the local taxing power. TheConstitution on this point states: “Each local government unitshall have the power to create its own sources of revenues andto levy taxes, fees and charges subject to such guidelines andlimitations as the Congress may provide, consistent with thebasic policy of local autonomy. Such taxes, fees, and chargesshall accrue exclusively to the local government (Sec. 5, ArticleX, 1987 Constitution)-The LGUs has the power to tax through a

Constitutional grant. There are two ways of granting the localgovernment units the power of taxation either:

I. Constitutional Grant

II. Legislative Grant.

In our jurisdiction the power of taxation is granted to the LGUsby Constitutional Grant. This is found in Article X, Section 5 of the 987 Constitution.

So remember that tax laws are legislative in character once it isenacted the executive shall implement the said tax laws.Moreover, it is also the duty of the executive to promulgateImplementing Rules and Regulations regarding such law. Sothere is a need for tax laws to enacted by the legislative body sothe initiative should come from the Congress however there isanother exception with this general rule that the Congress has

the sole power to initiate tax laws is the People’s Initiative andReferendum or RA 6735. Under RA 6753 there are two wayswhereby citizens can initiate laws particularly tax laws withoutviolating the non-delegation of the taxing power. When we talkabout RA 6735 when we proposed people’s initiative andreferendum, initially we have to gather signatures, now

when it is enacted either revenue or a non-revenue measure it isnot merely taxation puwede other initiatives. So whether youpropose, you may amend or repeal a law through people’sinitiative and referendum. So first you gather the neededsignatures then you go to the COMELEC after that if the

signatures were able to reach the required number by theCOMELEC then the COMELC will have a plebiscite. So theproposal now is given to the electorate then there will be votingof whether they are in favour or not and if there’s yes vote thatwould become people’s initiative and referendum. However,there is also another mean provided by the same law howeverthis one is not that popular, the indirect initiative whereby thereis this certain group of people (Petitioners) who will file a petitionfor indirect initiative with the House of Representatives thensuch initiative bill will undergo the normal legislative measurebut it will not be the Congressman who will be the sponsor of thesaid initiative bill but the petitioners who submitted such

petition. So these are the two modes under RA 6735.

3. TERRITORIALITY OR SITUS OF TAXATION-Which the power totax is limited only within the territory or boundary of jurisdictionto tax. In other words, the State has no extra-territorial jurisdiction because we go back to the rule that it is the law-making body which has the discretion in determining the situs of taxation. However, this limitation admits an exception thepersonal tax. The OFWs in 1998, we do not tax anymore theincome of the OFWs because they are already classified as non-residents Filipinos since they are in abroad and it was stated inthe new law that the State shall not tax the income of non-



residents so this is an example when the state exercises jurisdiction. So even if the subject or object of tax is outsideState, the State can pursue or exercise personal jurisdiction overthat subject even if that subject is outside the territory the Stateshall afford to it similar protection and it should also have similarbenefits. So this is how the state exercises jurisdiction.

4. INTERNATIONAL COMITY- This is in accordance with theprinciple that a sovereign cannot tax another sovereign. NowSec. 12 Art. II of our Constitution declares that the Philippines“adopts the generally accepted principles on international law aspart of the law of the land and adherence to the policy of peace,equality, justice, freedom, cooperation and amity with allnations”. Since the power of tax is inherent among States thenwe could not tax other sovereign. Moreover, there is also theprinciple common usage among states that when one enters theterritory of another, there is an implied understanding that theformer does not intend to degrade its dignity by placing itself under the jurisdiction of the latter and there is also the principle

of the non-suability of states where it is useless to assess tax. This is a self-imposed limitation due to public policy and for

practical consideration. So yung mga income ng diplomaticcorps at dahil sa US-RP Agreement yung mga income ng servicemen sa Subic are not taxable.

5. EXEMPTION OF THE GOVERNMENT AGENCIES ORINSTRUMENTALITIES- In other words, the State does tax itself. This is a self-imposed limitation by reason of public policy andsome practical considerations. While there is no law orprohibition that the State may not tax itself, it is absurd andimpractical for the State to tax itself so there is this self-imposedlimitation. This immunity from taxation only applies for thegovernmental functions whereby an agency exercisesgovernmental or sovereign functions. But when an agencyexercises proprietary functions like the GOCCs operates publicutilities and the charter of such GOCC provides for a taxexemption then it has an immunity from taxation but if thecharter of any GOCCs which has proprietary function does notprovide for tax exemption then such agency or instrumentalitydoes not have any immunity from paying taxes.

Constitutional Limitation

* The constitution is the a source of the taxing power of thestate. The constitution simply defines and delimits this power tostrike a balnce between the power of the government andfreedom of the governed and to safeguard the latter frompossible abuse by the former.

* These limitations are not grants of the taxing power, being thetaxing power an inherent in the state.

Purpose: to provide safeguard or system of check and balance inconnection with the way the state will exercise the taxing power.

DUE PROCESS

Section 1. No person shall be deprived of life, liberty, or propertywithout due process of law, nor shall any person be denied the

equal protection of the laws.

* This provision does not directly involves in taxation. However,this is a limitation. WHY? It is because the power of taxation isenforced contributions/burden amounting to a taking of aproperty, which requires to be afforded with just compensationand due process.

WHAT IS REQUIRED FOR A VALID TAKING? There must be a lawthat provide for the basis of taking. Pursuant thereto, enforcedcontribution from the people cannot be made without a lawauthorizing the same. Otherwise there will be a violation of theconstitution where tax collection is made without any lawenacted by legislators authorizing such collection.

2 aspect – that BOTH must exist

1. Substantive – tax statute must be within the authority of congress and it must be fair, just and reasonable. There must bea law allowing the taking.

2. Procedural- the law provides for a mechanism and relief where you can challenge the assessment of the charge.



a. Ex. Non-payment of tax by a delinquent taxpayer. A

delinquent taxpayer is afforded with a notice and hearing or atleast an opportunity to be heard.

WHEN CAN THERE BE A VIOLATION OF DUE PROCESS

1. When a tax law is made to apply outside the sovereign state

a. Could also be consider a violation of the inherent limitation of territoriality. Tax law should be applied within the territory. Inthis case, there is also a violation of due process as well.

2. When the tax law is not for public purpose

a. In the case of Pascual vs Secretary of works, governmentfunds was appropriated for improvement of a private road whichlater on, was subsequently donated to the government. Will the

subsequent donation cure the defect of absence of publicpurpose? SC RULED: No, that money was set aside for publi8purpose for the benefit of private entities. Its subsequentdonation will not cure the defect of lack of due process.

3. When a tax law is made to apply retroactively

a. GR: Tax laws should be applied prospectively

b. Exception: 1. If retroactive is not harsh and oppressive( Castro vs Collector) . 2 If the law provides for its retroactivity

such as there is a legislative intent.

CASTRO vs Collector 4 scra 119

Maria Castro also known as Madam X questions theconstitutionality of War Profit tax law for being made to applyretroactively. SC RULED: WPTL, is valid although made to applyretroactively. It can be given such effect because it is not harshand oppressive.

EQUAL PROTECTION

Section 1. No person shall be deprived of life, liberty, or propertywithout due process of law,

nor shall any person be denied the equal protection of the laws.

* This provision is not directly deals with tax. We apply thisbecause of the principle of “equality”

WHAT IS EQUAL PROTECTION? – All person subject of legislationshall be treated alike, under like circumstances and conditionbut in privileged conferred and liability imposed. It does notrequire that person or property different in fact be classifiedunder the law although they were the same. What is prohibitedis class legislation or discrimination or favoritism.

Congress has a leeway/ disposition to determine who rae to betaxed or not without violating the equality so long there is nodiscrimination. Relate this principle to Artcile VI section 28(1) of

the consti.

EQUALITY vs UNIFORMITY

Arcticle VI Section 28.

1. The rule of taxation shall be uniform and equitable. TheCongress shall evolve a progressive system of taxation.

A. Uniformity- means all taxable articles or kinds or property of the same class shall be taxed at the same rate regardless of where they are found. A tax is uniform when the same force andeffect in every place where the subject of it is found.

It does not signify an __ but a geographic uniformity. Whereverthe subject is found the tax shall be apply to the subject orobject where it is found.

IS THERE A DISTINCTION BETWEEN A UNIFORMITY ANDEQUALITY?

For the purpose of taxation, jurisprudence would say; no, therenone.



It means that for the purpose of equality, the congress mayvalidly calissify the subject or object provided the classificationto the following requirements:

1. Substantial distinction;

2. Germane to the purpose of the law;

3. Must not be limited to existing circumstances only;

4. Apply to all members if the same class.

CASES

Lutz vs Araneta

SC RULED: No violation

That the tax to be levied should burden the sugar producersthemselves can hardly be a ground of the complaint. Indeed, itdeprives rational that the tax be obtain precisely from those whoare to be benefited from the expenditure of the funds desired forit. At any rate, it is inherent in the power to tax that a state befree to select subject of taxation and it has been held thatinequalities which results from singeling out one of the particularclass for taxation on exemptions infringes no constitutionallimitation.

Shell Co of PI vs Vaño 94 Phil 397


Pertains to occupation fee. SC ruled it is a valid classification notonly under present condition but also to future with a substantialsimilar situation.

The contention here that the ordinance is discriminatory andhostile because there is no other person in the locality whoexercise such designation or occupation is also without meritbecause the fact that there is only one and no other person in

the locality who exercise such designation or calling does notmake the ordinance discriminatory or hostile.

Manila Race Horse vs De la Fuente


The Ordinance here pertains to the boarding stables of racehorses. It was question, Bakit boarding stable lng mga racehorses , bat wala ung ibang horses: SC ruled: there is a validclassification for there is a real and substantial distinction. Sovalid sya and not discriminatory.

Association vs Municipal Board of Manila

SC RULED: there is a violation

Road users tax was only made to be paid by the registered

drivers of manila. So it was question bakit kami lng angbumabayad? SC RULED, the said ordinace is null and void.

Ormoc vs __ February 17 1988

SC RULED: there is a violation

Sa pangalan pa lng ng ordinace here, it can seen maydiscrimination na talaga. SC held

that while at the time the sugar deller is only the petitriuoner, it

means that future or new producers are not to be covered. Sohere ,the ordinance is nuill and void. ( limited to existingconditions lang)

Sison vs Ancheta

SC RULED: There is no violation

Pertains to gross qualified income tax scheme. Here there are 3classifiacation namely: Purely compensated income eraners,self-employed and professionals. Mas mataas and tax ng mga



professionals and it was questioned by them. SC held that saidordinace is Valid

B. EQUALITY

Basis of taxation shall be the means of one’s ability to pay.

Note: our tax system is progressive. I means more direct taxthan indirect dba.

PROGRESSIVE SYSTEM OF TAXATION

Section 28. (1) The rule of taxation shall be uniform andequitable. The Congress shall evolve a progressive system of taxation.

This concept is different form progressive rate. Progressive taxrate are based on ability to pay while regressive rate do not

depend on the ability to pay, example VAT.

NOTE: regressive rates/system of taxation is not prohibited inthe constitution.

Tolentino vs SEC

EVAT is not a violation of SEC 28(1) article VI. The constitutiondoes not really prohibited the exposition of indirect tax whichare like VAT , that is regressive. What is simply provides is thatcongress shall evolves a progressive system of taxation. It

means that direct taxes are to be preferred as much as possible,indirect tax should be minimized.

CAN YOU GO TO COURT TO COMPEL CONGRESS TO HAVE APROGRESSIVE SYSTEM OF TAXATION? NO. section 28(1) articleVI is merely directive. The provision is a moral incentive tolegislation, so not mandatory.

SECTION 10 ARTICLE III- Non impairment clause

Section 10. No law impairing the obligation of contracts shall bepassed.

Non-impairment clause applies to taxation but not to ED and PP.for the purposes of taxation, it does not apply to privatecontracts. As a general rule , Non impairment clause is superiorto the power of taxation. Taxing provisions cannot alter existingrights under a contract.

Cassanova vs Hord

This pertains to tax exemption in a contract of naturalexploitation. There was a tax law which was later enacted. SCruled , no hindi mawawala ang tax exemption nya because to doso would be a violation of non impairment clause.

General rule: NIC is superior to taxation.

Exception: section 11 artcile 12 on franchise

Section 11. No franchise, certificate, or any other form of

authorization for the operation of a public utility shall be grantedexcept to citizens of the Philippines or to corporations orassociations organized under the laws of the Philippines, at leastsixty per centum of whose capital is owned by such citizens; norshall such franchise, certificate, or authorization be exclusive incharacter or for a longer period than fifty years. Neither shallany such franchise or right be granted except under thecondition that it shall be subject to amendment, alteration, orrepeal by the Congress when the common good so requires. TheState shall encourage equity participation in public utilities bythe general public. The participation of foreign investors in thegoverning body of any public utility enterprise shall be limited to

their proportionate share in its capital, and all the executive andmanaging officers of such corporation or association must becitizens of the Philippines.

Tolentino vs SEC

PAL question the VAT because the contract … according to PAL,hindi sya labot because of the NIC. SC ruled that NIC is notapplicable to PAL a being a public franchise. Section 11 article12 of the constitution provides



that the congress as may be to require can alter, repeal contractinvolving franchises.

WHAT ABOUT PRIVATE CONTRACTS? Lets say si Dara buycandies to BOM the supplier with 10% included interest for thespan 10 years. Subsequently a tax law was enacted that insteadof 10% magiging 12 na sya, so EVAT. BOM alleges that Dara

should pay more kasi sa bagong tax law. Can she do that? INCshould apply? SC ruled that no, INC should not apply, kasi in thiscase it involves a private contract relationship.

NON IMPRISONMENT FOR FAILURE TO PAY TAX

Section 20. No person shall be imprisoned for debt or non-payment of a poll tax

Walang makukulong kapag di ka nagbayad ng cedula. Theprovision is a prohibition againt imprisonment for non- payment

of poll tax.

July 2, 2013 8-9 PM

Transcribed by: Mae Bungabong

Constitutional Limitations (PART 2)

We are still on the limitations on the power to tax. We havetaken so far the constitutional limitations on due process, thelimitation on equal protection for requiring taxation, together

with this limitation on the rule of uniformity and equity of taxation and that directive that upon Congress to evolve aprogressive system of taxation. We also covered the non-impairment clause-this limitation is superior to the power of taxation meaning the non-impairment clause yields or thetaxation laws yield to the non-impairment clause but notapplicable in the case of franchise because franchise is subjectto amendment, alteration by Congress on other words we couldnot invoke the non-impairment clause when it involvesfranchises. Then you have also the limitation on the non-payment of poll tax that no person will be imprisoned for thenon-payment of poll tax.

Now to cover other Constitutional limitations you have Article 6Section 28 (3) of the Constitution provides that charitableinstitutions, churches and parsonages or convents appurtenantthereto, mosques, non-profit cemeteries, and all lands, buildings,and improvements, actually, directly, and exclusively used forreligious, charitable, or educational purposes shall be exemptfrom taxation. ***So this time we have a direct provision in the

Constitution in connection in taxation however this time theprovision, it grants tax-exemptions. Now, when you dissect theprovision you have here an enumeration of properties and youcould notice that these properties, in its generic sense are realproperties because it involves lands, buildings andimprovements. Now the concept of real properties as provided inthe Constitution is the same as to your property. In the study of property you have the enumeration of what are immovables,what are the kinds of real properties. So what is the grant of exemption here is the tax on the property but what is the natureof the exemption? The property that would be exempted fromtax, when will it be used? Actually, directly and exclusively one

for religious second for charitable purpose and for educationalpurpose. In other words, the grant of tax exemption refers toproperty tax exemption. The property tax on these immovablesbut the exemption may come in when they will be used for thesepurposes either for religious, charitable or educational so that isthe nature of the tax exemption. Now remember while thepower to tax is inherent that power involves also the power togrant tax exemptions. Now in the Constitution there is a grant of tax exemption. So what is the nature of tax exemption grant inthe Constitution? This does not need what we call an enablinglaw; there is no need for legislation. Tax exemptions in theConstitution are self-executory. You don’t have to go to

Congress for them to have an enabling act of legislation to grantthe exemption because the Constitution already grants theexemption but take note of the restrictions of the limit of theexemptions. In other words, in connection with this exemption itis not the ownership that determines the exemption so even if the building is owned by the Archdiocese but it is being rentedto others for a lease or for a rental or for a fee then that propertydespite ownership is by the religious is not covered by the taxexemption because the use is not for religious it is being rentedfor commercial use so it will be not given an exemption. In thesame way that a non-stock, non-profit educational institutionowning a piece of building but some portions of the building are



being rented for fees and lessees pay rentals for the use so eventhough owned by a non-stock, non-profit institution educationalinstitution which is engaged for educational purposes still thatproperty would not be covered by the exemption because of theuse it was not actually, directly and exclusively use foreducational purpose, it is not then covered by the exemption.

Now take note also, the grant of exemption while they are orcovers actually, directly and exclusively use for religious,charitable or educational purposes the exemption extends tothose incidental to the purpose.

***You have that case of Abra Valley College vs. Aquino (162SCRA 106) where it has been asked in the bar. Where theground floor is being rented, the second floor is being used asresidence of the School Director, the third and the upper floorswere used as classrooms so the question is the propertyexempted from real property tax? In so far as to the third andthe upper floors they are covered by the tax exemption because

the use is for educational. In so far as the second floor beingused as the residence of the school director the Court said that itis still covered by the exemption because it includes those whichare incidental to the purpose while being used as residence theor that residential use is inclusive or incidental to theeducational purpose of the institution so it is still covered by theexemption. You also have the ground floor; the ground floor willnot be exempted because it is not educational nor evenincidental for the educational purpose. So it will be taxable. Thesame with the cases of Herrera vs. Quezon City Board of Assessment (3 SCRA 186)

And the case of Hospital de San de Dios vs. Pasay City (16 SCRA226) wherein you have the charitable hospital or institutionwhich provides for living quarters, recreational facilities for theirdoctors, nurses including the medical staff so for their, for theirgoodwill of the hospital of the medical staff of the hospital theyprovide playing facilities like swimming pool, living quarters so itwas whether these facilities were covered by the exemption. TheSupreme Court said yes they are because they are incidental tothe purpose.

Now in the recent case of Lung Center where the Quezon Cityassessed the Lung Center for real property tax and within theLung Center, you have the facilities of the hospital and portions

of the buildings were being rented to the doctors of the hospitalso they have their clinics there and they pay rent to theinstitution so Quezon City assessed the Lung Center for real

property tax so the Lung Center claimed for the exemptionunder Section 28 (3) in the template the clinics, the portionsbeing occupied are being used by the doctors as their clinics arestill covered by this section. The Supreme Court said no becausethe use of the clinics are for the charitable purpose of thehospital and they are clinics being rented by the doctors so theyare subject to real property tax. They are not covered by theexemption.

We also have the case of YMCA. Wherein the YMCA a charitableinstitution allows the non-member of YMCA to use the parking lotfor a fee and it also grant lease to those interested lessees to

rent out some portions of the YMCA building so the fees and therentals were collected and they claim the exemption so whenthis matter reached the Supreme Court, the Supreme Court saidthat they are not covered by the exemption and they are not usefor the purpose so they are subject to tax.

Now take note that the exemption again while the scope of property tax exemption covers those actually, directly andexclusively use for religious, charitable or educational purposesthe extension of the exemption includes those that areincidental to the purpose.

Now another grant of exemption but a constitutional limitation,you have Article 6 28 (4) which provides that no law grantingany tax exemption shall be passed without the concurrence of amajority of all the Members of the Congress. ***This pertainsnow to the enactment of a tax exemption statute, this theratification requires upon Congress. Now the set-up in our caseis that you have two houses, the Senate and the House of theRepresentatives so what is the Constitutional requirement forratification? In the event that a tax exemption is passed thevoting requirement is the concurrence of the majority of allMembers of Congress. To determine the majority, you don’t

have to add all the members of the Senate and the House and



determine the concurrence of the majority vote of all. In otherwords, we are not talking about the majority of the quorum butthe majority of all the members of Congress. Now if you did notconstrue the concurrence of the majority of the members byadding the members of the Senate and the House of Representatives but the two houses voting separately. So theremust be a concurrence of all the majority members of the House

of the Representatives as well as the concurrence of all themajority members of the Senate. To have this tax exemptionstatute to be allowed or to be passed otherwise, it will notbecome a law. It will not be apply because of that requirement.So that is the voting for tax exemption. Now if it is just a regularrevenue measure you do not require anymore of theconcurrence of the majority members of the Congress but themajority of the members constituting its quorum because whenthe 2 houses meet there is a quorum then if there is a quorumthen it will do business. And it will pass that piece of bill orlegislation for approval it will require the majority of the voteunlike a tax exemption.

Now other Constitutional limitation is Section 19 Article 7 thepower of the President. Except in cases of impeachment, or asotherwise provided in this Constitution, the President may grantreprieves, commutations, and pardons, and remit fines andforfeitures, after the conviction of final judgment. He shall alsohave the power to grant amnesty with the concurrence of themajority of all the Members of the Congress. ***So a grant of amnesty may be done through executive action or if theexecutive asks permission under Section 19 Article 7 of theConstitution.

You have also Section 5 (2b) Article 8. This is the power of theSupreme Court in connection with tax cases including othercases. This defines the extent of the power given by theConstitution the Supreme Court under Article 8 Section 5 (2b).Now in this provision the Supreme Court shall have the power toreview, revise, reverse, modify, or affirm on appeal or certiorari,as the law or the Rules of Court may provide, final judgementsand orders of lower courts in all cases involving the legality of any tax, imposts, assessment, or toll, or penalty imposed inrelation thereto. In other words, in connection with tax cases it isstill the Supreme Court which is the final arbiter. All tax caseswhether it emanates administratively through the executive

branches or through the executive part of the government thenit is brought from exhaustion of administrative remedies to the judicial action still the final say will be given to the SupremeCourt. Because they have that power to review, revise, reverse,modify, or affirm on appeal or certiorari as the law or the Rulesof Court may provide, final judgements and orders of lowercourts all final judgement in all cases so this include tax cases

legality of any tax, imposts, assessment, or toll, or penaltyimposed in relation thereto. So all these matters should bebrought before the Supreme Court for its final adjudicationunless the party did not bring it, it will attain its finality as lawbut nevertheless anyone who bring it up ad pursue his cause forfurther remedies the Supreme Court will have the final say. Inother words, for the purposes of assessment and collection of the payment of the tax Congress therefore cannot legislate thatwhatever the decision of the BIR in so far as in assessing howmuch tax will be paid by the taxpayer it will not legislate thatthe decision of the BIR will be final and executory and no longercould not be appealed or even review for certiorari because that

will be an encroachment of Section 5 (2b) Article 8 of theConstitution. In other words, the Supreme Court could not bedeprived of that power otherwise if you allowed that theexecutive that their decision involving tax would be final andcould not be longer appealed, review before the Supreme Courtthat is null and void because that is unconstitutional. A violationof that provision.

Now other Constitutional limitation is Article 3 Section5.xxxxxxxxxxxxxxx. The free exercise and enjoyment of religious profession and worship, without discrimination orpreference, shall forever be allowed. xxxxxxxxxxxxxxxxx . In

other words as ruled in American Bible Society vs. City of Manila(101 PHIL 386) the power of taxation yields to the free exerciseof the religious profession and worship. So freedom of religion issuperior to the power of taxation. Now in the American BibleSociety case the sale of Bibles and other religious literature byreligious organizations although have a little profit could not beconsider taxable transaction for it will be violative of theConstitutional provision which guarantees to freedom of religious profession and worship. Now when you relate theAmerican Bible Society case to Tolentino vs. Secretary of Finance (235 SCRA 613) and the ruling for the MR is 249 SCRA628. One of the petitioners in the case of Tolentino because



there are 9 consolidated cases yung title lang is Tolentino vs.Secretary of Finance. These were also decided and related. Soone of the petitioners there was the Philippine Bible Society andunder RA 7716 in the expansion of the Value Added Tax one of the transactions which wherein it covered the taxation on theimposition of the VAT on the sale of publications, publishedworks and articles, magazines and newspapers and etc. together

with the Philippine Bible Society we also have the PhilippinePress Club which questioned the taxation or the imposition of the VAT on the sale of newspapers which will encroach upon thefreedom of speech. Now the case of Philippine Bible Society thetax imposition on the sales of the Bibles will now violate theConstitutional provision on the freedom of religion againsttaxation. The ruling rendered in that case of Tolentino, itabandoned the decision of the American Bible Society case.Because this time the VAT now is imposed upon the sale of publications, articles, magazines including the Bibles. See thisnow is a violation of the freedom of religion thus, you may nowabandon the American Bible Society case. The Court said no

while it is directly not saying that we abandon the AmericanBible Society case is still a valid ruling. In other words, there wasno abandonment of the ruling of American Bible Society case butcan we still tax without abandoning the American Bible Societycase, can the government still tax the sale of the Bibles by PBSwithout violating the freedom of religion? Now how did the Courtrule on this? Now the withdrawal of the exemption did notviolate freedom of religion so when the VAT now under RA 7716included the VAT on the sale of books, articles, including theBibles such withdrawal of exemption did not violate the freedomof religion. As in the case of the Philippine Bible Society onreligious articles as the free exercise of the free religion clause

does not prohibit imposing generally applicable sale of tax in thesale of religious materials by religious organization as held bythe US Supreme Court in the case of Jimmy Swaggart Ministriesvs. Court of Equalization because in 1990 the US Supreme Courtruled that the religious organizations in the US would be subjectto tax as held by the US Supreme Court in the case of JimmySwaggart Ministries vs. Court of Equalization. So you could taxthem without violating freedom of religion because imposing agenerally applicable sale or use of tax of the sale of religiousarticles by religious organization is not violating the freeexercise of religious laws so it will not result to a prohibitionfollowing that US ruling. Now the VAT registration fee did not

constitute censorship of such freedom of press and freedom of religion as held in the American Bible Society case. The fee ismere administrative fee and not imposed on the exercise of privilege much less as a Constitutional right but for the purposeof mere cause of registration which is a requirement and centralpicture of the VAT system so as to provide tax records, taxcredits because when you are under the VAT system the VAT

taxpayers are required to register and they are made to pay aregistration fee so it was the contention by the Philippine BibleSociety that the VAT registration fee aside from the tax wouldalso result for the violation of the freedom of religion butimposing upon them the VAT registration fee which would rendera violation of the free exercise of religion guaranteed by theConstitution again the Supreme Court ruled otherwise that theregistration fee does not constitute censorship to such freedom. The fee is a mere administrative fee and not imposed on theexercise of freedom much less a Constitutional right but for thepurpose of praying cause of registration and a requirement of the VAT system. Now, however, after this ruling the Congress

reviewed insofar as the VAT on books, newspapers and otherpublications noh reviewed and removed from the VAT systemthe taxation on the sale of books instead they came out withanother legislation on the treatment on the treatment of so farbooks and other publications, newspapers, printing andpublication of books etc. so they were taken out from the VATsystem.

Another Constitutional limitation is Section 29 (2) Article 6 of theConstitution which provides for the prohibition of appropriationfor religious purposes. So cause for the separation between theChurch and the State, the State therefore could not appropriate

money or set aside money for religious purposes because thatwould be unconstitutional so there is a prohibition againstappropriation for religious purposes however not in cases tothose employed in the Armed Forces, to the leprosariums, andother government facilities and institution. What about thepayment of the wages does this now infringe upon theConstitutional provision? The Supreme Court said no. Becausethe payment of wages to the religious kasi nga may mga pari saArmed Forces, may mga pari sa mga penal colonies, sa mgaleprosariums and other government facilities and institutions somay suweldo sila so money is appropriated para bayaran silaand that is not within the context of the prohibition under



Section 29 (2) because they are in payment for servicesrendered without violating the prohibition. And of course, youhave to pay their wages, their food, their shelter, their clothingso they are payment for services rendered.

So you have also Section 4 (3) and (4) Article 14 of theConstitution. The prohibition against taxation of non-stock,

non-profit educational institutions. Now that is under Article 14the exemption of non-stock, non-profit institutions now underSection 4 (3) of Article 14, all revenues and assets of all non-stock, non-profit institutions use actually, directly, andexclusively for educational purposes shall be exempt from taxesand duties. Upon the dissolution or cessation o]f the corporateexistence of such institutions, their assets shall be disposed of nthe manner provided by law. The first paragraph deals with thenon-stock, non-profit educational institution and it grantsexemption from tax on their revenues and assets and dutieswhich are use actually, directly, and exclusively for education

purposes. This is a grant of tax exemption for non-stock, non-profit educational institutions. Question: Is the grant of taxexemption under this article or does this grant more exemptionthan the grant of exemption under Article 6 Section 28 (3) onproperty tax on educational institutions? Now, if educationalinstitutions are removed from Section 28 (3) Article 6 do theystill enjoy property tax exemption under Section 4(3) of Article14? Now, in so far as the scope of exemption Section 4 (3) of Article 14 grants more exemptions in so far as non-stock, non-profit educational institutions. Unlike in Section 28 (3) of Article6 yung exemption diyan is property tax lang pero yung grant ngnon-stock, non-profit educational institutions grants more kaysa

yung nasa Article 6 Section 28 (3). Now, yung exemptions coverall revenues so what are these assets? Mga properyt ng mganon-stock, non-profit institutions if they are use for educationalpurposes exempted in other words, even if they were excludedinsofar as educational institutions in Section 28 (3) Article 6maski wala sila doon meron din naman sila dito sa Section 4 (3)they are entitled for property tax exemptions and more pa. Itincludes income tax and others for long as the revenues andassets are used for educational purposes. So does this includeindirect tax? So when a non-stock, non-profit educationalinstitution would purchase materials for the construction of building while they may be removed from the VAT? The answer

is no they are still covered by the VAT because that is an indirecttax, it would be charged and pass on to them. But not in thecase of direct tax, insofar as direct taxes that is their exemption.For direct taxes they are covered by the exemptions but not forthe indirect. Now, what about importation, when they are madeto pay customs duties still it includes the generic for taxes sotheir exemption covers as well as tariffs and customs duties so

when they import for as long as they are for educationalpurposes that is covered by the exemptions. Now the grant of exemption here, granted by the Constitution is automatic even if you don’t have any action of legislation to grant exemption butto avail of the exemption you could not just go and invoke, “I aminvoking Article 14 Section 4 (3) and I should be exempted.” No!But to apply for a tax ruling you write to the Secretary of Finance, let us say the school for their buildings instead of buying steels locally we would like to import steels from abroadso their imports came from abroad they will write now to theDepartment of Finance and ask for a tax ruling that they areimporting as this much and they will ask for exemptions, the

DOF will reply of course the school will invoke Section 4 (3)Article 14 because this section refers to all revenues and assetsfor the exemption of taxes and duties so whenever you importlike for example bakal hindi naman yan for educational purposeyes, but we are putting up a building which is for educationalpurposes and that is covered by the exemptions the DOF wouldgrant the tax ruling given the tax exemption so what they importnow and if there is tax ruling then hindi na kayo i-aasess for taxduties. The same way also what about for income tax noh so youhave now a building the ground floor and the second floor areused lease, pinaparentahan, pinapaupahan, incomes are earned,is their income taxable? So now, what is the grant of exemption?

The grant of exemption refers to all revenues and assets whichto be used for educational purposes. So yung kita nila fromcommercial spaces and they are brought in back to theinstitution and used for scholarships, used to purchase buses,used to construct classrooms then it will be covered by theeducational purpose then it will be exempted but if the incomewill not be used for educational purposes then it will be covered,it will be now taxable. Now in the YMCA case the Supreme Courtlaid down the 2 requisites for the grant of exemption underArticle 14 Section 4 (3):

1. It is a non-stock, non-profit educational institution.



2. The income, the revenues and assets were used foreducational purposes.

So having been utilized for education purposes then it is coveredby the exemption. Now tuition fees collected or even rentalsgenerated for its commercial activities co-mingled and depositedin the bank and earned interests, that interest income will also

be covered by the tax exemption because the scope is verycomprehensive, all the revenues and assets it includes thereforits interests income from bank deposits, when it uses theirincomes to provide for its needs, buy shares of stocks and theyhave their money market and income is earned and the incomeis still use for educational purpose then it is tax exemptedbecause the key there is ano ang utilization ng lahat ng kita, if the utilization or the use is for educational purposes then it iscovered according to this section otherwise if it is for other usethen it will be taxable. At the end of the school year insofar asnon-stock, non-profit educational institutions they are, as part of their reportorial requirements when they file income tax returns

of course they are exempted but they still have to fileinformation return because when you are exempted from tax itdoes not follow that you are exempted from filing an informationreturn. When we go to the exemptions you will learn thatexemptions are construed strictly so if exempted ka sa tax, yunlang ang exemption mo, it does not cover filing for therequirements. So you have still to file a return unless the lawgives you that exemption from filing tax returns so they file taxreturns but they don’t pay the tax because the utilization of allthe income that they have derived from educational and non-educational income and if they are used for educationalpurposes then it will be covered by tax

exemption. So that is the scope of tax exemption. Now bigschools are assessed by BIR for income tax, for VAT, for etc.kasali yata ang Ateneo, there were cases but all of these caseswere dismissed because the schools were able to show theutilization even if you have earned income from your non-educational activity, you have commercial spaces being rentedby others for as long as the income is utilized for educationalpurposes then it satisfies the Constitutional grant of taxexemption.

JULY 03, 2013 Tax I Lecture

Let’s go back to the provision on the exemption on the non-stock, non- profit educational institutions. Art. XIV, Section 4(3,4) is a grant of tax exemption given to non- stock, non- profiteducational institutions.

xxxx

(3) All revenues and assets of non-stock, non-profit educationalinstitutions used actually, directly, and exclusively foreducational purposes shall be exempt from taxes and duties.Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the mannerprovided by law.

Proprietary educational institutions, including thosecooperatively owned, may likewise be entitled to suchexemptions, subject to the limitations provided by law, includingrestrictions on dividends and provisions for reinvestment.

(4) Subject to conditions prescribed by law, all grants,endowments, donations, or contributions used actually, directly,and exclusively for educational purposes shall be exempt fromtax.

When the educational institution that would be referred to herewould be a proprietary educational institution, the paragraph 1of the provision will not apply. Even the 2nd paragraph. Soproprietary educational institutions are stock educationalinstitutions, example of which is those cooperatively owned orthose organized by a cooperative, may be subject to tax

exemption with limitations provided by law. So there must be alaw defining the extend of the exemption of those proprietaryeducational institutions, including restrictions on the dividendsand provisions on investments. The law on the restrictions or thescope of exemptions is in the NIRC, the National InternalRevenue Code. It is the NIRC in Section 27b which will providethe scope of the limitation in connection with the exemptions of proprietary educational institutions. Briefly, in so far as of proprietary educational institutions, are not entitled to fullexemptions but they are entitled only under the law, the NIRC,of a preferential tax rate. In other words, they are still taxablekaso yung rate nila is lower lang than the regular corporations.



So they are entitled to a preferential tax rate. Under thecondition that led pre- dominant income are educational income.So if you are a proprietary educational institution but your pre-dominant income are non- tuition income, like rents, over 50% of your income are non- educational then you will be subject to theregular corporate tax. But if the proprietary educationalinstitution has a pre-dominant income of tuition income then you

will enjoy the preferential treatment at 10%. So that is the lawthat will provide in so far as the privileges and benefits that willbe given to proprietary education.

Then in Section 4, Art. XIV, subject to the conditions prescribedby law, all grants, endowments, donations, contributions usedactually, directly, exclusively used for educational purposes shallbe exempt from tax. This refers to the donor’s tax. The NIRC onthe provisions on the donor’s tax will provide the scope of theexemption on what conditions or restrictions on the exemptionswill be allowed. It is the law that will provide for the conditionsfor the exemptions. In other words, in the different set- up of

educational institutions, it is the non- stock, non- profiteducational institutions which enjoy the most exemptions. So itis practically exempted from direct taxes, including customsduties, as long as they are for educational services.

What are the other constitutional limitations?

You have Section 24, Art. VI is in connection with the ORIGIN of AREVENUE or TAX MEASURE. In Section 24, Art. VI, it providesthat “All appropriation, revenue or tariff bills, bills authorizingincrease of the public debt, bills of local application, and privatebills, shall originate exclusively in the House of Representatives,but the Senate may propose or concur with amendments.”

So in Section 24, Art. VI, when it involves appropriations,meaning when the government now fix the budget or whenthere is a proposal for a tax measure, we call this as revenue ora tariff bill in case of customs duties. When we deal with taxationthere is revenue. It is required under the constitution that thesebills shall originate exclusively from the House of Representatives. In other words no revenue measure or anyproposal to amend, repeal any tax laws or the tariff and customscode, it is unconstitutional if they will be introduced first by the

Senate.

With this constitutional provision, does this mean that the Houseis superior than the Senate? It does not mean that the House issuperior than the Senate. With the last part of the said provision,despite the exclusive origin in the House, it does not deter theSenate to propose or concur with amendments. In other words,there will be a revenue measure in the House, then the Senatemay do its counter- part.

Going back to the case of Tolentino, there are severalconstitutional issues and constitutional tax limitations issues. Inconnection to Section 24, Art. VI, Sen. Tolentino questioned thevalidity of RA 7716 or the E- VAT, claiming that the VAT law didnot originate from the House of the Representatives. To put itsimply, there was a tax measure introduced in the House. TheSenate has its own version of the E- VAT. In the constitution,since you have two houses in Congress, these two bills willeventually be consolidated and it will be called a “bicam” or a“bicameral conference committee”. The bicam now will addressthe consolidation of the bills so that one revenue measure will

be consolidated and its draft now will be presented to the twohouses. However, the draft that came out was different from thehouse version and from the senate version.

So the final draft bill which resulted from the bicam was differentfrom the house and different from the senate. So when it wassigned into law, Tolentino questioned the validity of that lawbecause that law did not satisfy the requirements of section 24,article 6, because what was the contention of Tolentino is that itwas a third bill that come out from the consolidation. So, is therea violation of this Section 24, Article VI? The SC ruled on this thatthe Congress has complied with the requirements of Article VI,

Section 24, despite that the consolidated bill was different fromthat of the House and even the Senate. “A bill originating in thehouse will undergo such extensive changes in the Senate thatthe result maybe a rewriting of the whole. As a result of theSenate action, a distinct bill maybe produced and to insist that arevenue statute maybe substantially the same as the house billwill be to deny the senate’s power not only to concur onamendments but also to propose amendments. It would beviolative of its co- equal legislative power of the two houses orfor to allow that would make the house superior to the Senate. ”In other words, even if the draft that came out was different orsome of the features came from senate, still it is valid since they



are co- equal. For as long as the bill originated from the Housethis does not prevent the senate from making amendments. Itmay concur with the version or may have its own version for aslong as it has the same title.

There is no basis to compare the power of the two houses.Legislative power is vested in Congress consisting of a Senate

and the House of the Representatives not in any particularmanner. There is no difference the Senate reserving the up tothe enacting clause and writing its own version up to theenacting clause and at the other hand, separating a bill of itsown on the same subject matter. Kasi even if iba2x ang versionnila for as long as it is a bill from same subject matter, this willnot violate section 24 of Article VI. In either case, the result willbe two bills on the same subject matter. The constitution simplymeans that the initiative for filing revenue, tariff or tax billsauthorizing for an increase of a public debt, bills of localapplication, and private bills, shall be from the House of Representatives, but that does not prohibit the Senate of a

substitute bill in its anticipation of a receipt of a bill from theHouse.

This issue was raised when the VAT was further expanded underRA 9237. They presented the same issue. Take note of the rulingon the case of Tolentino, no violation of Section 24, Article VI.

You have Section 26 (1), Article VI, in connection with theabovementioned, while it is generic in every bill as we apply it totax bills or revenue measures, “every bill passed by theCongress shall embrace only one subject which shall beexpressed in the title thereof.”

Then you have presidential taxing power, Article VI, Section 27(2), “the President shall have the power to veto any particularitem or items in an appropriation, revenue, or tariff

bill, but the veto shall not affect the item or items to which hedoes not object.”

You have Article VI, Section 29 (3), “All money collected on anytax levied for a special purpose shall be treated as a special fundand paid out for such purpose only. If the purpose for which a

special fund was created has been fulfilled or abandoned, thebalance, if any, shall be transferred to the general funds of theGovernment.”

This is because there are revenue measures that are targetedfor a specific subject or object of taxation where the money thatwill be raised will be set aside for a special fund and for special

purpose. So the revenue that will be generated will only bespent for that purpose. If the purpose for which that special fundis created has been fulfilled or abandoned, the balance shall betransferred to the general funds of the government. Becauseordinarily, any tax measure that has been enacted by theCongress, once it has been implemented, revenue will go to thecoffers of the government, which is the general fund and fromthat general fund, there is now there then the government willmake an appropriations act, set up a budget on what will be theneeds of the government. So where do they get the money? Of course from taxes, fees and charges. It is sourced out from thegeneral fund.

But if the revenue measure or tax law is for a special purpose, itis for a special fund then hindi yan gagalawin. It will not go tothe general funds of the government or coffers of thegovernment but it will set aside. In other words parang restrictedna pera yan for a special purpose.

Then you have Article VII, Section 21, “No treaty or internationalagreement shall be valid and effective unless concurred in by atleast two-thirds of all the Members of the Senate.”

Now, a state may enter into a tax treaty with another state, forpurposes of reducing the effects of multiple or double taxation. Itis because a subject of taxation maybe taxed in the Philippinesand at the same time taxed in the place where that incomeraised. For example, when the state now would invoke thenational jurisdiction on that subject person like before 1998, theOFWs or the nonresident Filipinos who are earning incomeabroad will be taxed in the place where they are working and hewill be taxed in the country where is a citizen of. So, if Pinoy xa,even if he is not in the Philippines, he will still be taxed by thegovernment and in the country where he is residing, pwede i-taxpa rin xa. So, yung impact on that person will be he will be taxed

twice. He will be taxed in the country where is residing and he



will be taxed in the country where he is a citizen. So you havethe effects of double or multiple taxation. So reduce this burden,one of the remedies is to enter into this tax treaty. Theconstitutional issue now is, “is a tax treaty subject to Senateratification?” Generally, tax treaties are mere executiveagreements. So they do not require section 21,article VII orsenate ratification. Unlike the Rome Statute or of WTO, these

require Senate ratification. But when the government enters intoa tax treaty with another sovereign for purposes of reducing theimpact of taxation, while it is a treaty or an internationalagreement, it is not of that stricture that it will require SenateRatification under Section 21, Article VII. Kasi executiveagreement lang man xa. Unlike an international treaty, whereeven if we are signatory, it will not be binding if it is not ratifiedby the Senate. But not in a regular tax

treaty. Tax treaty will just be signed by the president or even theSecretary of Finance as alter ego of the President without theneed of Senate Ratification.

In connection with Local Governments, we have discussed thisalready, in Article X, Section 5, “Each local government unit shallhave the power to create its own sources of revenues and tolevy taxes, fees and charges subject to such guidelines andlimitations as the Congress may provide, consistent with thebasic policy of local autonomy. Such taxes, fees, and chargesshall accrue exclusively to the local governments.” That is thepower of taxation given to LGU. That is a constitutional grant.Now your Local Government Code operates as a guideline as tothe scope and limitations not the grant of power. The grant of taxing power of LGUs is given by the Constitution.

Then you have Section 11, Article XIV. This requires legislation. Itprovides, “The Congress may provide for incentives, includingtax deductions, to encourage private participation in programsof basic and applied scientific research. Scholarships, grants-in-aid, or other forms of incentives shall be provided to deservingscience students, researchers, scientists, inventors,technologists, and specially gifted citizens.”

Still we go back to that basic principle that the power of taxationis legislative because there must be an act by the Congress or

legislation for an enactment of tax law. While the power of taxation is inherent, it still needs enactment of laws.

For next week we will take up Situs of Taxation, Double Tax,Escape and the Exemptions.

Taxation July 9 2013

TAXATION SITUS

Situs of taxation- It is the place of the taxation. The place wherethe state exercise jurisdiction to tax a person property orproperty rights. The difference subject or object of taxation, wehave situs of taxation.

It is the nature of lawmaking body which is the power to

determine situs on how the basis to tax or activity to tax or theprotection and benefit that it will afford still to the object orsubject of taxation. The determination of the situs is also givento the legislature body. Of the difference subject or object of taxation, we have

Person, property and property rights

1. Person- The place of taxation or situs is the residence. This isusually the basis of situs.

2. Property- the situs of taxation is the place where the place islocated. ( Lex rae sitae- ART 17 of CC)

a. Personal property

i. Tangible – The place where the tangible personal property islocated

ii. Intangible – ex.. shares of stocks. As a GR, the rule follow ismobilia sequitor – the thing follows the owner. However, asidefrom such, another rule for the purposes of determining the situsof Intangible personal property, the place where the right is



exercise. As the case of Forbes vs bank, where there was aforeigner who died based abroad who has stocks in the Phil,when the latter died in abroad and among the properties leftbehind is the shares of stocks in the Philippine, there theproblem starts. If we follow the mobilia rule, the thing follows theowner. However that rule was not applied. They apply the rule inthe place where the right is exercise. Despite the decedent was

a nonresident alien but there was the property of the decedentbehind in the country, the Philippine tax is applied by applyingthe rule “the situs is the place where the right is exercise” Whenis the right exercise?

Since the shares of stocks is subject to Philippine protection, theshares of stocks shall be subject to Philippine taxation.

b. Income- Usually the situs is on the basis of citizenship. If youare an alien and you’re a resident in the Philippine, you will stillbe subject to Philippine tax be reason of your residency. So forthe purpose of income taxation you will be taxed be reason of

your citizenship, second residency and the third one by reasonof the source of income. This means that even you do not residein the hilipines for as long that your source of income is in thecountry, you will be charged by Philippine tax.

c. Business or exercising one’s occupation or taxable transaction- the situs is where the business or occupation or transaction isexercise.

d. Gratuitous transfer of property- Under our tax code, there are2 mode of transfer. 1st, is the transfer that takes effect upon bythen (succession) and 2nd transfer by way of donation (act of liberality). For purposes of the situs of gratuitous transfer of property, the situs is on the basis of citizenship. If you are acitizen in the Philippine and even if you died in abroad and madea donation there, you property is subject to Philippine estate tax.If you are an alien, you will still be subject or your estate to taxin case of death, or you made a donation, you will be subject tothe Philippine by reason of residency. The 3rd is the location of the property. Even if you are a nonresident alien and you madea donation over a property located in the Philippines or upon youdeath one of the properties left behind is in the country, suchproperty shall be subject to donor or estate by reason of its

location in the Philippines. In this case, the situs is either. 1.Residency, 2 citizenship or 3 the location of the property.

MULTIPLICITY OF SITUS

What about the principle or concept of Domicile? Wherein theobject of taxation will be subjected to

several taxing condition. That one subject or object will be taxedtwice. You have the effects of multiple situs or Multicilicity of situs by reason brought about by what you called in variousdomicile. As a consequence of such, that subject or object will betaxed more than once, or be taxed by different jurisdiction thatcauses burdens. And that would burdensome on the part of thetaxpayer. For purposes that the state will reduced or lessen theburden of the multiple situs, the state may provide (somebrought by legislation) remedies. The following are theremedies:

1. Tax exemption- Ex. Of this this the case of OFW. OFW before1998, their income is subject to Philippine tax. So if they areworking abroad as a nurse, their income is subject to US tax lawand that same income by reason of citizenship is subject toPhilippine income tax. After 1998, we grant now tax exemption.We will not covered anymore income tax by our nonresidentcitizen or OFWs. Aside from that in your NIRC, since the OFWsends money, and they set up foreign currencies, kung nandunnayan sa banko sentral, that money there ,,… that is the lawgranting tax exemtion in order to reduce the or lessens theburden of the multiple situs.

2. Tax deduction- ex. Is to allow the tax you pay abroad to bededucted against your gross income. Similarly, prior to 1998when a nonresident earn to income abroad I said a while ago itwill be subject to Philippine income tax. Since a foreign incometax is paid, the Philippines grants a tax deduction of the foreignincome. The income tax pay sa abroad, that will be in a form of deduction to lessen the burden. We allow the foreign tax pay asa deduction to the gross income.

3. Tax credit- the foreign tax paid is creditable against thePhilippine income tax. since a part of that was already paid



abroad by , the foreign income tax will be creditable in thePhilippine income tax. Similar in the Citizen case, 1st by way of tax credit. Now what we apply is the tax credit.

4. Tax treaty On the basis of Reciprocity- a Filipino who residing/earning in that country and citizen of that country residing /earning in the Philippines may grant exemption or deduction on

the basis of reciprocity.

DOUBLE TAXATION

What is double or multiple taxation?

Double taxation is

* taxing twice

* by the same taxing authority

* within the same taxing jurisdiction

* for the same purpose

* for the same period or year; and

* for the same property.

All the elements must be present and absence one one, therewould be no double taxation.

Is double taxation prohibited? No our constitution is notprohibited and not unconstitutional.

In what way therefore can you attack the law that will result todouble taxation? You cannot attack the law on basis of doubletaxation. You can attack the law on the basis of violation of constitutional or inherent limitation.

When you enter into a deed of sale over a property, the taxabletransaction that would resolve since that the same will be

subject to 6% capital gain tax and the said sale be subject to

documentary tax ( Both found in the NIRC), does it involves adouble taxation? No, THE 6% capital gain stocks while the sametaxing authority ( BIR) with the same jurisdiction for the sameproperty does not amount to double taxation. Absent angelement na for the same purpose. The 6 % capital gain tax is aform of ___ and the documentary tax for entering into thattransaction. So different and purpose.

To go further that same deed will be subject to tax in theregistered of deeds by the local government. Mga maring taxdyan, now does this amount to multiple taxation? Nag tax ungBIR, LGU there are two authorities. No double taxation kasidifferent authorities. One is a national government while theother is in local government. Aslo different ang purpose.

Principles or forms of escape from taxation

This is by reason that taxes are burdens. We want to avoidtaxes. Considering this being enforced, tax payers

finds ways of some mode to avoid it. Here you must note thatthese modes are peculiar or not true to all transactions. They areonly applicable to certain transaction.

1. Shifting

2. Capitalization

3. Transformation

4. Evasion

5. Avoidance

6. Tax amnesty

Shifting- transfer of tax burden by the person who it is imposedby law to another person. It is peculiar to indirect taxes. It is onlyin the case of indirect taxes where shifting is based. Ibig sabihinpinaasa mo ung taxe impact to other person. So peculiar ortypical sya sa taxes Like vat, the vat is a tax liability of the



statutory payer which is the seller of such product. That sale willbe subject to the vat. However Being an indirect tax the vatcould be pass and added to the price, so the value now of theproduct contains the tax because the taxpayer is allowed to shiftthe burden of the tax to another. It is peculiar but to the case of indirect taxes.

When we talk about income tax / donor tax etc., this cannot beshift to other. You will be the one to shoulder the burden.

Shifting may take form to

* Forward

* Onward

* Backward

Like if we say in the case of VAT when the tax is pass on to theconsumer as part of the selling price it is a forward shifting. Butwhen the tax is absorbed by the person whom should be liable. That is a form of backward shifting. But when you encounter asseries of shifting whether continuous or not, that is what wecalled onward shifting even if the direction is in backwards. Ithappen when the tax is shifted 2 or more times either backwardor forward.

How do we know the shifting process.. ( here comes the table)

You have the producer and the selling price is 100 and the vat of

%12. This 112 product. In the hands of the producer ito ung totalcost. So sa distributer lalagyan yan ng another mark-up to makea profit plus the VAT, then that would be the new selling price.Now he sells that now to the wholesaler. The same processlalagyan nya to make a profit plus the VAT, then that would bethe new selling price. Next to the retailer. Of course he has tomake some profit plus the VAT again and then it would be thenew selling price. The retailer now sell this to the consumer andnot being the end consumer, Malaki na ang price.

When the vat is passed on from the producer to the distributer

one shift lang yan. So when we talk about the shifting process it

is between the seller and buyer relationship so one shift lng yan.And ung series na sya, onward na sya.

If it is backward shifting, it is the producer which absorb theburden. This happen when there is so much competition in theproduct.

CAPITALIZATION

It is peculiar only to particular circumstances noh. It is a form of backward shifting whereby future taxes or property sold arecapitalize at the time of purchase and deducted in lump someform the selling price. The capitalization therefore involves onlyin transaction if the purchase thereof is in form of a realproperties. Like you looking for an area to expand your businessand inconsideration of finding that real property for that purposethere would be several factors which the buyer would have toconsider. Between the buyer and seller, the buyer was able topurchase it only on 35 M so from 50M. The buyer has 50 M. so

from 50 M he was able to buy it at 35. Meron syan 15 M nasavings. What happens to 15 M? that is what he will capitalize. Itis a form of a backward shifting whereby future taxes of theproperty sold are capitalize at the time of purchase anddeducted in lump some from the selling price. Ung 15 M nasaving nya will be used to capitalize to answer to future taxes towhich the new owner now will be confronted as he becomes theowner of the property. Ung 15 M mabayad ng future taxes ngproperty.

TRANSFORMATION

Ito ung transformer. The transformation is peculiar to those inproduction or manufacturing process. You are producing –sardines or other consumer products

sabon, which are highly competitive products. This is effectivethrough the process of production. The transformation is doneby producing product at a lesser cost by improving the methodof production. How? Like in research development department,they invest in this to buy new machines and equipment toproduce more at a lesser expense. Locking for alternative, etc.By reason of that, the producer faces the tax, pati ang tax ina-



absrob na nya. The tax here is transferred into gain(?) throughthe medium of production.

AVOIDANCE

Usually what is asked in the bar is the distinction between taxevasion and tax avoidance.

Tax evasion is the resort to illegal or unlawful means in order tolessen with the payment of taxes or tax lodging punished by law. Tax avoidance on the other hand is the use of legally method toreduce tax liability also called as tax __. Like in choosing over adonation over deed of sale.

Tax exemption - It is a grant of immunity to tax. we will discussit next meeting.

July 10, 2013

Let’s continue our discussion on the principles on tax exemption.

The tax exemption as we mentioned is one of those forms of escape resorted to for purposes of reducing or perhaps avoidingtax liability.

When the power to tax is granted whether inherently or by aconstitutional or legislative grant because in the case of LGUsthat power to tax may be given legislatively through the law-making body or the Constitution, remember, that once thepower to tax is granted it would always carry with it – inherent inthat grant – is to grant tax exemption. When the power to tax isgiven, the power to exempt would always be there. Theprinciples therefore that we apply in the power to tax are thesame principles that we also apply in giving or granting taxexemption. So the tax exemption also adhere to the principles of the inherent as well as constitutional limitations - such that theexemption must conform with public purpose, should belegislative in nature, must conform to territoriality, mustconform to the principle of international comity - these wouldapply because of the power to exempt is not for public purposebut for private purpose then that violates an inherent limitation.

In the same way also in the context of the constitutional

limitations, the power to exempt should also conform to therequirement of due process, equal protection, equality and ruleon uniformity. So the exemption while it is a grant of immunityto particular persons, group of persons or a class from the taxwhich persons or properties or property rights are generallywould be taxable. The State now instead of generating revenue,the State now would grant immunity or tax exemption. Rationale

of granting tax exemption: Principle of public policy/ publicbenefit/ public interest because in lieu of generating revenue theState or the government is willing to shoulder the monetary lossby reason of the exemption for as long as there would be publicbenefit or public interest that will provide by reason of theexemption. The exemption must be grounded on public policyand will support public interest will be best served by giving it.When the State gives an exemption it notes that there would beloss of revenue but the government is willing to sacrifice the lossfor as long as there would be a public benefit or public interestthat would be served by reason of that exemption.

The tax exemption may be granted from the State through theact of Congress or by the national government or it will begranted through the LGUs. Now remember that in our structuresince the power to tax is given by the Constitution insofar asLGUs are concerned then that power can also get the grantingalso of tax exemption. In other words, the tax exemption is alsoconstitutionally granted. The principles therefore that we studyin the State’s power of taxation are the same principles that willapply when we grant tax exemption.

Now, the tax exemption may be based on contract, contained ina charter or the law creating the corporation or entity to which

the exemption is granted. As a rule, tax exemptions should bebased on principles of public policy and that there must be abasis for the giving or the granting if tax exemption. In thecontext of the non-impairment clause, there are contracts whichare not protected by the clause. When we connect non-impairment clause with tax exemptions, not all are protected bythe clause. We would ask “what are therefore the exclusionsthat are protected by the non-impairment clause?” These

are what we call contractual tax exemptions. When the taxexemptions are those what we call as the contractual taxexemption by reason that it was granted by the state, remember



the case of Cassanova vs Hord,, where the State granted taxexemption to the person who was allowed/authorized to exploitthe natural resources and because he engaged in that activity inexchange of that he was given tax exemption. If later on a lawnow there will be enacted taxing now that activity, the tax payerin so far that he was given tax exemption will now be protectedby the non- impairment clause because that exemption wasgiven in the nature of a contractual tax exemption. Another iswhen the government would like to promote of encourage thepeople to invest on government securities, yung mgagovernment bonds. The feature of that is that the interestincome earned will be given tax exemption. Later a law now isenacted that the interest income from government bonds/surety will be subject to tax. Will that new law affect and covernow and repeal the tax exemption given to that governmentsecurity which was given earlier a tax exemption? The answer isthat it cannot. It is protected by the non- impairment clause. Thetax exemption in other words will prevail because you will beprotected by the non- impairment clause. However, if that tax

exemption is not affected by the non- impairment clause, like inthe case of franchise that is engaged in public utility, in thecourse of the operation of the public utility either he will begiven an exemption or he will be given a lesser tax rate. If lateron the Congress will increase the tax rate or will now impose atax, can that franchise grantee invoke the non- impairmentclause? The answer is no. it is because in the Constitution, thereis a provision that franchises are no prohibited by the non-impairment clause. They are subject to amendments ormodification in pursuit of public interest and public purpose. Sothe exemption given is not in the nature of a contractualobligation. In the case of Meralco v City of San Pablo, the Laguna

area, including San Pablo, was part of the franchise area of Meralco. Meralco, under its franchise, was subject to pay for afranchise tax for a certain percentage based on proceeds. Thatfranchise tax, based on the percentage of their gross sales, willbe the tax to be paid in lieu of other taxes. In 1991, the LGC wasenacted imposing now a local franchise tax allowed to beimposed by cities and provinces. The city of San Pablo and theProvince of Laguna assessed the Meralco for a local franchisetax under the local government code. Meralco opposed theassessment saying that they were already liable for a legislativefranchise tax by virtue of the Congressional grant given to themto operate as public utility provider, that under that franchise

grant they were already made to pay for a franchise tax in lieuof paying other taxes. So when the Local Government now willassess Meralco of a local franchise tax they are not anymoreliable, invoking also the non- impairment clause. The SC said,NO. Meralco is still liable despite the fact that they are liable tothe national franchise tax for which it is granted by Congress,Meralco is still liable for a local franchise tax under the LocalGovernment Code because it is not protected by the non-impairment clause. Can you connect this with double taxation?Is there double taxation? There is none because you have twotaxing authorities, while it is also a franchise tax, one is imposedby the National Government and the other is imposed by theLocal Government. What we are saying here is that, taxexemptions are generally reasonable tax. So the tax exemptionis given by reason of a charter or a law creating that entity orcorporation which was granted the tax exemption.

Another principle on tax exemption is EQUITY. Can a tax payerinvoke equity for tax exemption? For example, A is now

exempted from tax so his neighbor now is invoking equity thaton the basis of equal protection I should also get a similarexemption. Can you invoke that? The answer is NO. You cannot

invoke equity as a ground for tax exemption. The neighborcannot invoke similar exemption on the ground of equity andequal protection. Remember that we have studied that singlingout subjects or objects of taxation whether for taxation orexemption does not violate equal protection as long as it willcomply with the requisites of a valid and reasonableclassification. So when you tax or exemption group of persons,all these must comply with the requisites of a valid and

reasonable classification, that when you exempt or tax, theremust be a substantial distinction which makes a real legalnecessity. So the requisites must also be complied for thepurposes that it will conform to the requirements of equality anduniformity.

Now, going back on that rule on equity, in one case of Florocement v Gorospe, florcement was given the authority toengage in mining and the raw materials that they generate frommining, the raw materials were used to produce cement. Now,the mining activity was given tax exemption. So, in themanufacturing activity and production of cement, the



government assessed florocement for an excise tax on themanufacture of cement. Florocement protested the assessmentinvoking equity as a ground for tax exemption because themining activity is a tax exempt. The raw materials emitted fromthat exempted activity are used as materials for the productionof the cements. Walang nagbago. Ang raw materials na ginamitsa production ng cement ay galing dun sa exempted activity,thus the production of cement should also be tax exemptbecause it came from those raw materials. The SC said NO. It isbecause the exemption that was given to you refers only to themining activity and not on the manufacturing of cements. Themining activity is different from your production of cement. Soyou cannot invoke equity as a ground for tax exemption.

Now, moving further, in your readings you have come acrosshow tax exemptions are to be construed. Tax exemptions are tobe construed strictly or construed not against the governmentbut against the one who asserts exemption. What does thatmean? It means that the tax payer has the burden or the burden

is incumbent upon the tax payer to prove that the exemption isgranted to him. You cannot invoke inference, you cannot invokevalidation. The law on the statute must provide the exemptionthat your activity is given an exemption otherwise if there is nolaw granting it then you cannot invoke exemption because taxexemptions statutes are given strict construction.

Tax exemptions are matters of personal privilege. It is nottransferrable. That is also the reason why you cannot invoke alsobecause tax exemptions are personal privilege given to thegrantee. It cannot be transferred or assigned withoutCongressional or Legislative consent. Tax exemptions are

generally revocable unless founded on contracts which isprotected by the non- impairment clause.

As to kinds of tax exemptions or classifications of taxexemptions.

As to manner of creation, tax exemptions may be express orimplied. Meaning there is an affirmative exemption if it isexpress or exemption by omission if it is only implied exemption.Meanings, if this people are taxable in this classification,meaning those people outside that classification, are exemptedfrom paying that tax. So there is exemption by omission.

As to its subject, it maybe personal tax exemption or animpersonal exemption. Meaning, if it is directed in favor of 7persons, then it is a personal exemption. But if it is directed tocertain group or class then it is an impersonal exemption.

As to scope or extent, you have a total or a partial exemption.Generally, the exemption will be applicable to tax payers who

are subject to direct taxes. In other words, the exemptions willalways refer to direct tax exemptions. You cannot invoke taxexemptions on indirect taxes. So when we talk about total taxexemptions, it means that a non- stock, non- profit institutions. They are practically given full exemption or total exemption tosupport them by exempting from taxes. When you talk aboutpartial tax exemptions, you are given exemptions to a certaintype of tax. Like the property tax exemptions on property usedin religious and charitable purposes. Of course, this refers onlyto property tax exemptions, thus, partial exemption. Is there anabsolute tax exemption? Meaning you are given exemption bothon direct and indirect taxes. Now, in the old case of NPC, where

the SC allowed practically an absolute tax exemption, in thecase of Maceda v Macaraig 197 SCRA 711. This is a taxpayerclass suit, filed by Senator Maceda, questioning the exemptionto NAPOCOR under PD 938. PD 938 grants exemption to thenNAPOCOR from all forms of taxes, whether national or local,whether direct or indirect. This tax exemption granted toNAPOCOR was sustained by the SC, which practically grantsabsolute exemption to the NAPOCOR. The exemption grantedunder PD 938 covers all forms of taxes, whether national orlocal, whether direct or indirect taxes. It is because generally,when you are tax exempt, you are exempted only on directtaxes, you could not claim exemption on indirect taxes. Thus,

this case is the exemption on the general rule.

Now, you have the sources of taxation exemptions.

1. Constitution- such we’ve discussed on the limitations of taxations.

2. NIRC (Tax Code)

3. Tariff and Customs Code



4. Special laws

5. Tax Treaties-- like that in the ruling made by the US SupremeCourt on Same- sex marriage in striking the DOMA or theDomestic Marriage Act or the Defense of Marriage Act, the caseof US v Hudson, the gay women entered into a same sexmarriage in Canada. They transferred in New York. Spouse of

Edith Hudson died. Under the Federal Estate Tax Law, thesurviving spouse is entitled to tax exemption from the estate of the deceased. Under the Federal Law on DOMA, the spousereferred to is the opposite sex. Like if the husband dies, thesurviving spouse is entitled or if the wife dies the survivinghusband is entitled. Now how about this gay spouses, like in thecase of Edith Hudson? This was recognized by the State of New York because by reason of comity, meaning that the principles of international law is part of the law of the land. The State deniedthe exemption because she was not the spouse defined by theDOMA. The IRS denied. This went to US SC, invoking now thatsince the state now recognizes same sex marriage, the federal

law therefore should not violate their marriage. You have a statelaw that recognizes same sex marriage but your federal lawdoes not, thus a violation of equal protection. So, now the US SCnow invalidates the DOMA and grant the recognition of asurviving spouse exemption. If not, it will violate the equalprotection and due process. Such it

says, “ no person shall be deprived of its life, property orliberty..” there is no mention there as to the gender of the“person” even in our own Constitution. when the DOMA refer tomarriages between a man and a woman, then it would be aviolation of the equal protection. It is interesting how our SC

might look at it. So now, the husband and wife or even same sexpartners may now claim exemptions. It is interesting how our SCwould look at it, for example as to same sex marriage, likeforeigners’ working in multinational company, who are marriedfrom a country which recognizes same sex marriage. Thenthey’re assigned in the Philippines and someone dies, how willthe exemption apply? This is interesting.

6. Local tax ordinances promulgated and enacted by LGUs.

For purposes of construction, we have, exemptions areconstrued STRICTLY. Taxation is the rule and exemption is theexception.

Then you have CLASSIFICATION STATUES. Classification taxstatutes are those laws which specify those subject and notsubject to tax. Now, are classification statutes, tax exemption

statutes? They are not. Classification tax statutes are not taxexemption statutes. When tax law makes a classification, like itoyung taxable, ito yung hindi, they are not tax exemptionstatutes. Thus, we do not apply strict statutory construction, weapply liberal construction on classification statutes.

Then also, we have this principle of TAX AMNESTY. Tax amnesty,like tax exemption, is construed strictly. It is because taxamnesty is the condonation of your tax liabilities. In this case of Republic v IAC (196 SCRA 335), a law granted tax amnesty. Thetax payer availed the tax amnesty. Now, complying and payingthe tax under the tax amnesty law, the BIR still ran after the PR

for deficiency of the paid tax. So the question here is, can thegovernment still run after the tax payer after he has availed of the tax amnesty? In the same way that when the governmentpardons, can the government still run after you? In the sameway as tax amnesty, the government can no longer run againstyou for deficiency taxes when you have already availed of thetax amnesty. What is therefore the nature of a tax amnesty? Atax amnesty operates as a general pardon or the intentionaloverlooking of the government of its authority to imposepenalties on persons otherwise guilty of tax evasion or violationof the revenue or tax law. Tax amnesty partakes of an absoluteforgiveness or waiver by the government of its right to collect

what is due it and to give tax evaders who wish to relent achance to start with a clean slate. Tax amnesty, like taxexemption, is not presumed in law nor never favored. Taxamnesty is actually a way of the government to generaterevenue. Kasi meron yung iba na takot magbayad ng tax kasi sapenalty na nag- ipon2x na. So that now, they will come out intoopen, the government now, through an act of Congress, enacts atax amnesty law. So generally, what you pay now is the basictax to the extent na ang dapat bayaran na due is 1M, pwede na50% nalang ang bayaran dahil the government waives thepenalties. This is not often. It is dependent upon the governmentlike during the time of Erap and Cory, to generate more fund. It



legally operates as a condonation since you are only made topay the basic tax and the rest of the penalties or charges kaywala na, thus the government cannot run after you for thedeficiency. TAX AMNESTY construed strictly.

Taxation I

July 16, 2013, 8-9 PM

Transcribed by: Mae Bungabong

G. Nature, Construction, Application of Tax Laws

As to the nature of our tax laws, tax laws are civil in nature evenif the taxing jurisdiction is occupied by the enemy our tax lawswill continue to be enforced because they are civil in nature. Sothey are not in other words political nor penal nor criminal innature so in your readings you have encountered that the Bill of

Attainder or the Ex Post Facto Law are not applicable in so far asin connection of the nature of our tax laws.

Now let’s go to the interpretation of tax laws. Now constructionrefers to the manner within which tax laws are being construedand we have set of rules which we apply for the purposes of construing the tax provisions or tax statutes.

1. Would be with regards to the legislative intent- Now tax lawsare to receive reasonable construction with the view of carryingout their purpose and intent. So one aspect in determining theintention of the framers of the law. In connection with a

particular statute. Because the construction does not apply only,the rules on construction does not apply only, exclusively to taxlaws. This rule can be applied to other legislations or otherstatutes. Even in your political law you also have the use of legislative intent and one way to determine legislative intent isnot only going over the provisions of the law but also going overthe debates, the minutes, going over the arguments that weredone in the course of Congress or in the law-making body. Sothe minutes, the deliberations , the debates these records arekept in the law-making body or by the Congress so you can goback if you, these debates, these arguments made by thelegislators on what was their intention in coming up with that

provision. So like for example in a tax law well they use or theyrefers tax payers as persons so when we deal with persons so dowe, what was the legislative intent? Does that refer only refer tonatural persons? And when we talk about persons in its genericsense and what was the intention of the Congress and in ourstudy you will discover that when we talk about persons-not onlythe natural, it also speak about the juridical persons. But in our jurisdiction, in so far as taxes, the taxpayers are not only thenatural persons or individuals but we also have juridical personslike corporation and you have partnerships so these are the taxpersons that are refer to so far as a particular provision in astatute. So now we go to one aspect of the rule of constructionby way of determining the legislative intent.

2. Now second rule is what if there’s doubt as to the meaningand construction, then in case of doubt tax laws are to beconstrued liberally in favour of the tax payer. The reason why weapply liberal construction in case of

doubt is that taxes are burdens so we, the law even the courtsthat in construing our laws are, it is stated more on the part of the tax payers and construed strictly against the government sothey are construed liberally in favour of the tax payers becausetaxes are burden.

3. Then you have the rule that when the language is plain andclear of the tax law so we take the literal meaning of thatstatute. The rule on construction as against the governmentwould not be applicable for the language of the tax law or thetax statute is plain and there is no doubt as to its legislativeintent.

4. Now we only apply strict construction when we deal with taxexemptions or to the tax laws granting tax exemptions we applythe strict construction. Meaning it is strictly construed against atax payer and liberally in favour of the government. However if you remember there is an exception to the strict constructionmeaning we apply a liberal construction when it involvesexemption in favour of religious, charitable, and educationalpurposes or when it is the legislative intent we apply by way of exception the liberal construction in the case of tax exemptions.But as a rule we apply the strict construction in connection withtax exemptions.



Then we have the application. Now we have taken this up whenwe discuss about due process. And one of the illustrations of what due process has to be applied in the exercise of the powerof taxation is that tax laws should be applied PROSPECTIVELY. Tax laws -we don’t apply them retroactively in so far as tax laws.So generally, we apply prospective application since the natureand amount thereof tax could not be foreseen and understoodby the tax payers at the time of the transaction which the lawseeks to tax was completed. So at the time of its enforcementwe usually apply the prospective application. The retroactivity isonly applied by way of exception and we apply retroactivity sothere’s a retroactive operation: 1. There is that legislative intentor 2. When retroactivity is not harsh and oppressive asillustrated in that case of Castro vs. Collector- in the case of thewar profits tax law where it allowed retroactivity because thelaw was not harsh and oppressive. The other one by way of exception is legislative intent. Meaning the law provides aretroactive application. This is illustrated in the case of Umali vs.Estaneslao and Gorospe vs. CIR (29 SCRA 446). Now briefly theissue involved in these two cases was the application of thepersonal exemptions. Now under our income tax provision,individual tax payers are granted what we call personalexemptions to answer the cost of living. Now the cost of livingbecause we have to give, you have to pay rent etc. you have topay for your family driver, your domestic expenses of whichwhen you are engaged in business or you are practicing aprofession you can’t be charged of this since there is noconnection with your business or occupation unless the driverwhom you hired is the driver who drives you in the conduct of your profession or your business or occupation but if it is foryour personal comfort or the family’s comfort like domestic help

these expenses could not be

charged as a deduction to the income of that individualtaxpayer. So the regular or daily expenses are not chargeableagainst income the law sets a limit which we call it personal andtraditional exemptions. Additional exemptions if you havequalifying dependents for the tax payer who engages inbusiness or practice of occupation the cost of living ischargeable to that account we call personal exemption. Now,what happened here in this case is that let’s say in 2001 thepersonal exemption granted let’s say Php25, 000.00. Now duringthat year that personal exemption was amended increasing it

let’s say Php30, 000.00. Let us say that the Congress in 2001increased the tax exemption to Php30, 000.00. Now afterpublication etc. Sometime in February 2002, the Php30, 000.00personal became effective. For tax year 2001, the deadline forfiling the income tax return is on or before April 15, 2002 sowhen you talk about tax year 2001 the filing of the annual ITR,you are given up to April 15, 2002 to file the Income Tax Return.And as an individual tax payer you are entitled to some personalexemption, so what personal exemption are you entitled to?When you file Income Tax Return on or before April 15, 2002. Sowill it be the Php25, 000.00 or the new exemption at Php30,000.00? So ito yung case that went up to Supreme Court. Doesthe tax payer entitled to claim the new exemption under thenew law when the return that he was filing cover a tax periodwithin which the lower exemption was then enforced so thisissue was brought up to the SC. According to the Supreme Court,the tax payer is allowed to avail the higher exemption even if the tax period covering that return covered the previous taxyear because at the time the filing of the return the newexemption became effective but the argument here is that, isn’tthat tax laws are prospective? Since this covered tax year 2001then the exemption in 2001 shall be applicable. Now the newPhp30, 000.00 exemption could not be applied retroactively in2001 because tax laws are prospective, this Php30, 000.00exemption should be applicable to the returns that will be duefor 2002. So when the en banc gather the law, the deliberationsin Congress they found out that it was the legislative intent thatit will have a retroactive effect so under that case of Umali vs.Estaneslao and Gorospe vs. CIR, the Supreme Court decided thattaxpayers are allowed to claim the new exemption because of legislative intent. The law allows by way of legislative intent to

give the higher exemption of the new personal tax exemptionagain that is only by way of exception. It is still the prospectiveapplication that will follow. Unless the law or the retroactivelyand it is not harsh and oppressive.

Then we have the provisions on mandatory and directoryprovisions of tax laws. Now we still go back to that principle thattaxes are burdens. And the taxes are the lifeblood of thegovernment and the government would like that the taxes are tobe collected on time. Then tax payers would comply to theirobligations also on time. So our tax laws will have mandatoryand directory provisions. Now MANDATORY PROVISIONS- are



intended for the security of the citizens or which are designed toensure equality or certainty as to the nature and amount of eachperson’s tax while DIRECTORY PROVISIONS are designed merelyfor the information or direction of officers or to secure amethodical systematic moves for proceedings. Now what is theimportance of having these mandatory and directory provisions?Now omission to follow mandatory provision renders the act orproceeding invalid to which it relates while failure or omission tofollow directory provision will not have a similar consequence. Sowalang kaso kung di mo sundin kung directory ang provision.But there will be a possible consequence when you failed tofollow mandatory provisions like deadline typical in our tax tohave deadline within which we have to pay our tax. If you fail itto pay on time then there will be penalty, surcharges and thelike as a consequence for failure to follow mandatory provisionsso like for example deadlines. You also have period to appealwhen a taxpayer is sent an assessment on a finding of adeficiency tax, he is given 30-days to protest the assessment sowhat will happen if he fails to protest? Then that assessment willbecome final then collection proceeding will follow to collect thedeficiency tax so that’s the consequence if you fail to protest. Sowhen you fail to protest, you failed to appeal on time, so theperiod to appeal you will be now caught in default and whateverassessment you received, it will become final and executory. Sothese are what we call mandatory provisions. So what aredirectory? Directory provisions are merely for convenience andfor a systematic and a methodical move in the conduct of theproceedings like the payment of taxes. We used to pay taxes toBIR but that would be too burdensome because mahaba angpila. S payment of taxes would be done through banking system.So banks are accredited by BIR so you don’t have to go to BIR to

pay your taxes. So now you just have to go to accredited banksto made payment for your taxes. The other is you have theelectronic filing so there is an electronic filing of your taxes andthe payment of the tax so you have to enrol to the electronicfiling system you make the crediting to your bank to have thatremitted to BIR so you don’t have to go to the banks and madepayments because you can just do it through online. So theseare new features under our system on paying taxes so these aredirectory provisions.

Then you have the matter on the sources of tax laws. Our taxlaws like tax exemptions, you can find them in the Constitution,

in the legislation, in the laws, the statutes enacted by Congress.From regulations, rulings, opinions rendered by our taxauthorities, judicial decisions and you also have tax treaties.

Now you have the Constitution the power to grant taxation evento the local government units. The power to grant taxexemptions even to non-stock, non-profit educational

institutions and to the property tax exemptions to realproperties which are used for charitable, educational, orreligious purposes. So these are the sources of tax laws in theConstitution.

From legislation you have NIRC, you also have the LocalGovernment Code, you have the Tariff and Customs Code for

taxes of importation and exportation, you also have the lawcreating the Court of Tax Appeals so far as the proceduralaspect of our tax laws, the substantive is addresses by our NIRC,by the Tariff and Customs Code and the procedural aspect is

addressed by the creation of the Court of Tax Appeals.

You have these regulations, rulings and opinions. Now in our jurisdiction the collective arm of the government in charged inthe collection of tax is the Department of Finance and under theDOF, you have these two agencies of government in charge of collection you have the BIR- Internal revenue taxes and Bureauof Customs-in the case for the tariff and customs duties on theimportation and exportation. So these are the two majorgovernment agencies in charge in the collection of taxes andthey are executive so the and the it is the thru the Secretarywho promulgates regulations for the effective enforcement of our tax laws. Now the Internal Revenue Code is the codificationof our tax laws and every now and then there is a new tax lawenacted by Congress as the amendment on provisions of theNIRC, the DOF upon the recommendation of BIR will promulgatethe necessary rules and regulations for the enforcement of thelaw so you call these revenue regulations. In Customs you callthis Customs Administrative Orders for these are regulationsenacted for upon the recommendation of the Commissioner of Customs to the DOF for the enactment and promulgation of regulations under the Tariff and Customs Code so in the case of regulations therefor, the regulations are inferior to the statute. The regulations cannot alter, add or even subtract to the



provisions of the statute so in the case of conflict between theregulation and the statute, the statute will prevail, the regulationwill become void if it will go beyond the provision of the statute.If the law does not provide for a penalty then a regulation isprohibited to impose one because the law there is superior thanthe regulation. Now our regulations are enacted and they arenecessary for the proper enforcement and execution of our taxlaws. They are intended to clarify, to explain the law and to carryits effect the general provisions by providing details of administration and procedure. Remember go back to the studyof principles when the agencies of the government enforced thelaw and when they promulgate rules and regulations they arenot enacting a tax statute they are simply implementing the taxstatute or tax law because these regulations are intended for theconvenience of tax payers and for the purposes of validity,regulations must not be contrary to law and the Constitution;second requirement, there must be publication either in theOfficial Gazette or newspaper of general circulation sorequirement of publication.

Now we have rulings and opinions. Now rulings and opinions to acertain extent will also have its own force and effect as a law.Now when a tax payer is confronted with a tax problem the lawallows him to make a query to the BIR or BOC depending kungano yung kanyang tax query. Now usually, he writes to theCommissioner of BIR or BOC that he is confronted with a taxissue and ask for a ruling or opinion whether it is taxable or he isexempt for that transaction so the Commissioner makes a replyon the basis of the facts presented to him that the transactionhe was going to enter to is taxable or the Commissioner maymake a ruling or an opinion that the transaction he will enter to

will not be taxable. So that will partake and will have a force andeffect of the law rulings and opinions however, rulings andopinions will be as good depending on the facts presented bythe tax payer because there will always be a caveat at the endof the ruling of commissioner that the ruling will stand so far asfacts presented but if the facts will change then theCommissioner will make a reservation that the ruling maychange. The rulings and opinions will stand valid as the facts andthe circumstances presented by the tax payer on a certain taxquery. Now in practice like you have Section 40 of the NIRC isprovision on a NO gain or loss transaction an example of that iswhen you could create a corporation now instead of putting cash

you would put in real property in exchange of shares of stocks oryou want to invest in that corporation so instead of putting cashyou put in real properties and in exchange of that bibigyan ka ngshares of stocks so under Section 40 such exchange of realproperties for shares of stock is a no gain or loss transaction ibigsabihin hindi siya taxable na transaction. Now ordinarily if youpay with a real property regardless of consideration whether theconsideration was in cash, in a barter or in a manner of exchange that transaction is subject to capital gains tax so toavoid the impact of the capital gains tax for reason that underSection 40 that exchange is tax free you write to the BIR and askfor ruling that you will be buying some shares in that corporationand instead of paying cash you will pay real property inexchange of the shares of tax. So the Commissioner will nowmake a reply and of course in your letter you will invoke theexemption under Section 40 because the exemption is not self-executory hindi siya automatic kailiangan muna ng ruling sowhen the BIR now will reply by the reason of the facts presentedthen the transaction that you will enter into will be tax freeunder Section 40 so with that ruling you can now enter into thatexchange so you will file a return, the capital gains tax returnand attached to the return the ruling because your local BIR willnot accept the argument maski yung bring in there the NIRCbefore the Revenue Collector and sasabihin mo under Section 40and I am a third year law student, under Section 40, your localBIR will not believe you because they will rely to the ruling evenif the rule is there it is not automatic so when you file yourcapital gains tax return you attached the Commissioner’s rulingsa makita na ng local BIR that you are exempted so hindi ka namagbayad eh kung walang ruling magbabayad ka talaga kasinga hindi naman yan automatic. You will be issued now a tax

clearance and the certificate of authority to register the transfernow you will go now to ROD dala dala with the ruling, the taxclearance that you are exempted from that transaction. Sothat’s what we do in practice of tax exemption in so far as to theapplication. So you have these rulings and opinions.

Then you have judicial decisions so judicial decisions of coursewhen you talk about judicial decision these are rulings made byour courts. Now the courts that do or address tax problems youhave the Court of Tax Appeals then the Supreme Court sodecisions and rulings made by these courts will also have theforce and effect of a law. Now in NIRC, tax cases under NIRC-so



you have that CIR (Commissioner of Internal Revenue) who isthe head of BIR so all proceedings will start as an administrativeprocess and when you have cases involving protestingassessments under our tax system taxes under the NIRC arecalled self-assessing taxes so when we call them self-assessingtaxes it is the taxpayer himself who determines the tax liabilitywe don’t usually go to the BIR and ask the examiner the revenuedistrict officer magkano ba yung tax na babayaran ko? Becauseour taxes under NIRC are self-assessing so it is started to thefiling of tax return so dyan nagsisimula. We file tax returns andpay the tax on the basis of the returns kaya nga self-assessingkasi ikae yung nagdedetermine kung magkano ang tax nababayaran mo. Whether it is in the form of income tax, estate,donor’s, VAT etc. so you will pay your tax based on the returns.So after you file your returns, these returns will be subjected towhat we call assessment. The assessment is the process of audit, investigation, and examination of your tax returnsincluding your financial statements etc. to find out whether theamounts in your tax returns are accurate. So your return issubjected to what we call assessment. After assessment you willbe notified, there will be a notice of the findings made by therevenue examiner so you will be notified so there will be whatwe call notice of assessment. So when the taxpayer nowreceives an assessment that the BIR has found a tax deficiencyyour remedy unless you will just pay the liability there you will just pay the deficiency tax but if you do not agree with thefindings you will file a protest on the assessment, you bring thatprotest to the CIR, the CIR will make a decision on your protestwhether he will grant or deny your protest. So when theCommissioner will grant your protest eh di tapos kasi theCommissioner agreed to you in rebutting the findings like for

example the BIR will say that you will be paying 1 million peroang sabi ni tax payer no and he protested that assessment andpresented that his deficiency is 100,000.00 lang so theCommissioner granted that protest. Now in case of denial theremedy of the tax payer is to appeal to the Court of Tax Appeals.Now in the CTA, it is appealed first before the division then it isbrought to the CTA en banc. Then finally to the Supreme Court.So that’s the process in any tax deficiency will govern. So thedeficiency will start from the returns that you have filed in thecourse of the assessment so you have decisions along the way. The decisions of the Commissioner which is administrative froman administrative it will be now converted into a judicial action

where you now appeal to the CTA actually this is a lengthydiscussion but this one is a simple presentation because there isstill the period 180 days basically when the CIR would deny yourprotest your remedy is to appeal before the CTA to the divisionthen even if talo ang gobyerno the government would stillappeal before the CTA en banc then from there to the SupremeCourt. The other case is the claims for refund ganun din yungprocess. In filing for a tax refund, you will file that before the CIRthen from the CIR if it is denied then you will go to CTA bydivision then CTA en banc then to the Supreme Court. But againit is pursued administratively at first just make an appreciationkung saan ba ito galing itong mga judicial decisions na sinasabidito. From the CTA decided by the division, from the CTAdecided en banc and then finally by the SC.

When we go to the Tariff and Customs Code, the Tariff andCustoms Code naman well you have assessments of thecollector of the imports and customs duties the protest is filedbefore the collector of customs. From the collector you have the

Commissioner of Customs (COC) from the COC it is convertedinto a judicial action to the CTA division then CTA en banc thenthe Supreme Court. Ganun din yung process when you deal withforfeiture proceedings. In the forfeiture proceedings like yungseizure and forfeiture proceedings like yung there is an illegalimportation of an article or articles are brought in our countryunlawfully so these articles will be seized and will be subjectedto forfeiture proceedings the seizure and forfeiture proceedingswill be initiated before the collector of customs when articles arebrought unlawfully or acts involving smuggling or articles arebrought in fraudulently, misdelacaration or under declaration sothese articles will be seized including the mode of transport-

yung barko, eroplano, or land transportations. Yung mga taxablearticles or ito yung mga contrabands so they will be seized. So judicial decisions from this will also emanaes from the CTA andthe Supreme Court.

Then you have tax treaties again tax treaties are executiveagreement we don’t require the Congressional or Senateratification when we talk about tax treaties these are mereexecutive agreements which the President or the Secretary of Finance as the alter ego to enter into treaties with othercountries. So tax treaties entered into by way of reciprocity,



again the purpose is to reduce the multiple impacts of situs of taxation.

So we have this one aspect of the nature of tax laws that taxlaws are special laws they are not in a nature of general laws.Ano ba yung mga general laws? Civil Code it is a general law sowhen there’s a conflict between the provisions of special laws

and general laws, which will prevail? Tax laws as special lawsshall prevail over the general law. So when a tax law is enactedthen for the purposes of effectivity this will require publicationbut the law does not require under the tax law the manner of publication in most of the laws we always see that the Congresswill specify it will be published in the OG or in a news paper of general publication. So the law did not provide the manner of publication so the law was published in the OG which is therequirement under the Civil Code but tax laws are to bepublished in the Official Gazette (OG) so that will also render thetax law even if a special laws effective because having satisfiedthe requirement of publication. Even if the law does not provide

where it would be published. So what if it is

published in a newspaper of general circulation? Will the lawnow be invalid? Because under the general law the publicationshould be on the OG so this might be a problem in the future.Usually our tax laws and other laws revenue or nonrevenueprovide manner of publication either they provide in thenewspaper of general circulation or in OG and newspaper of general circulation.

TAX - July 17, 2013

Taxpayer’s suit – it is an action in the nature of a class filed tosecure relief on actions of public officers or officials involving thedisposal of public funds adversely affecting the commonpersons(?) of a class or taxpayers or taxpayers in veteran withinthe jurisdiction of a taxing authority. So when we say abouttaxpayer’s suit it is not just a suit by a person who is a taxpayer.When a taxpayer files a suit, it is not a taxpayer’s suit but anaction in the nature of a class representative filed to seek relief from actions of public officers or officials involving the disposalof public funds.

The important matter or aspect involving taxpayer’s suit isdetermining what we call the real party in interest or thisprinciple of necessary interest. Now as a rule, a taxpayer suit isfiled by a person who will be injured, who will suffer an injury asa result of the enforcement of a statute. For purposes of ataxpayer’s suit, the real party must be one who will really beinjured by enforcement of the law. In other words, personaldamage or injury was then the criteria to determine who will bethe real party in interest to file a taxpayer suit. Personal damageor injury has been liberalized wherein personal damage or injuryis not anymore necessary. The rule now in filing a taxpayer suitis now that involves public interest. GR: The validity of a statutemay be contested only by one who will sustain a direct injury asa result of its enforcement but taxpayers had been held to havesufficient interest in preventing the illegal expenditure of moneyraised by taxation. Personal damage or injury is no longernecessary but public interest.

Kilosbayan vs. Guingona (232 SCRA 110) – Kilosbayan a non-

governmental organization headed by then Sen. Salonga filed ataxpayer suit against the PCSO. PCSO in the operation of thelotto had the operation leased with another entity called PGMC(Phil. Gaming Management Corp.) so there was a contract of lease entered into between PCSO and PGMC to operate the lotto/lottery. That contract was challenged by Kilosbayan regardingthe validity of the contract. The respondents questioned thepersonality of Kilosbayan whether it is a real party in interest ordoes it have the legal personality to file the taxpayer suitbecause ordinarily the taxpayer suit can be filed only by theperson who will suffer a direct injury or damage. Will Kilosbayanbe damaged by the enforcement of that contract of lease?

According to PCSO, walang standing yung Kilosbayan to file thiscase noh. Hindi naman sila affected by that contract of lease. The SC said YES. Objections to taxpayer’s suit for lack of personality, lack of standing or lack of interest may be set asidebecause they are technicalities of procedure. The transcendentalimportance to the public in these cases demands they be settledpromptly and definitely. The issues raised are of paramountpublic interest. One implication now for purposes of filing ataxpayer suit is one that affects public interest. Any citizen nowmay go to court and challenge the validity of a contract enteredinto by the government with other entity, when that contract orlaw would affect what we call public interest. According to the



SC, this contract of lease entered into by PCSO and PGMCinvolves public interest. How was this justified? The ramificationsof such issues immeasurably affect the social, economic andmoral well-being of the people even in the remotest barangaysof the country and the counter-productive and revenueregressive effects of the envisioned on-line lottery system asstaggering as the billions in pesos it is expected to raise. Thelegal standing then of the petitioners deserves recognition andthe SC set aside procedural barrier which respondents tried totake advantage of. The issue involves public interest.

On the 2nd issue, is the contract of lease valid? The SC said NObecause under RA 1169 – the law creating PCSO – the contractviolates RA 1169 because the operation of the lottery is onlygiven to PCSO. The law prohibits PCSO from holding andconducting lotteries in collaboration, association or joint venturewith any person or entity whether domestic or foreign. Thecontract of lease is not actually a lease but a joint venture orcollaboration or association in violation of the law.

Cruz, Europa vs. DENR (347 SCRA 128) – in connection with theconstitutionality of the indigenous people’s rights act. JusticeIsagani Cruz and late Atty. Europa filed a case before the SCquestioning the constitutionality of the IPRA. Their personality tofile the taxpayer suit was questioned claiming that the partyauthorized to file a taxpayer suit are only the indigenous peopleor the Lumad. Insofar as that issue, the SC allowed thepetitioners - that they have personality and that they are realparty in interest to file this taxpayer’s suit. Now one

criteria brought by the Court in this case involves the principle of

public right. When the issue involves public right then the partyhas the personality to file a taxpayer suit.

In several cases, the Court has adopted liberal attitude withregard to standing. The proper party requirement is consideredas merely procedural and the court has ample discretion. Asearly as 1910, the Court in the case of Severino vs GovernorGeneral held that the private citizens may enforce a public rightin behalf of other citizen. The court has recognized that thepublic right or that which belong to the people at large may alsobe the subject of an actual case or controversy. Petitioners ascitizen possessed the public right to ensure that the national

patrimony is not alienated or diminished in violation of theConstitution. Since the government, as the guardian of thenational patrimony , holds it for the benefit of all Filipinoswithout distinction as to ethnicity, it follows that a citizen hassufficient interest to maintain a suit to ensure that any grant of concessions covering the national economy and patrimonystrictly complies with constitutional requirements. Thepreservation of the integrity and inviolability of the nationalpatrimony is a proper subject of citizen or taxpayer’s suit.

The legal standing or real party in interest for purposes of taxpayer’s suit since they are merely procedural may be setaside for as long as the issue affects public interest for one thatinvolves public right. That is what we call a transcendentalimportance.

TAX PYRAMIDING – the principle was introduced in the case of PPvs Sandiganbayan, Bienvenido Tan (467 SCRA 414),Commissioner Tan of BIR abated and cancelled over 300 million

tax liability of ad valorem and specific taxes of San MiguelCorporation (SMC). There was an assessment against SMC of 300 million tax liability and then Commissioner abated orcancelled that assessment. BIR accepted a compromise of 10million. So the 300 million tax liability nagcompromise angcommissioner na okay na kami sa 10million. For that actionmade by the Commissioner of BIR which was disadvantageous tothe government. An anti-graft case was filed against Tan and hewas convicted by the Sandiganbayan but later on an MFR, hewas acquitted. The people went to the SC for certiorari kasiinacquit siya. Claiming the assessment received by SMC becamefinal when it failed to appeal to the Court of Tax Appeals and

that the acquittal in favor of Tan was erroneous. In so far as thetax issue, the SC came up with this term or principle - TAXPYRAMIDING. The reason why the Commissioner abated orcancelled the 300million tax liability because a tax pyramidingoccurred. In other words, in the production of the beer that is anassessment what we call specific taxes. Now, that taxes wasadded to the cost and came out with the selling price. The totalselling price was added already taxes – the specific tax in theproduction of beer. When it was sold, it was subject to the advalorem tax. So yung tax na yun, tinaxan pa. The tax wasalready there in the price at the production, when it was sold it



was taxed again for the ad valorem tax. When you tax anothertax this is what we call a case of tax pyramiding.

Tax pyramiding has no basis in fact in law, has been rejectedsince 1922 by the Court, the legislature and the tax authorities. The intent is to obviate a tax imposed upon another tax. Ataxpayer cannot be compelled to pay a tax on the tax itself. That

is what we call tax pyramiding. So tax pyramiding is not allowed.By reason of the tax pyramiding, the liability of SMC went ashigh as a pyramid. Kasi nagpatong patong which should nothave been allowed and the acceptance of the 10millioncompromise was valid.

Diaz vs Secretary of Finance (654 SCRA 96) – this involves whenyou use the expressway and you pay toll fees. The issue here“are toll fees taxes?” because one of the objections in imposingthe VAT in toll fees is that they contended that toll fees aretaxes so you cannot impose VAT anymore in the toll fees. Tolloperators questioned the imposition of the VAT on their toll way

operation claiming that the toll fees they have collected frommotorists are taxes. So are toll fees taxes? The SC said NO, tollfees are not taxes. A tax is imposed under the taxing power of the government principally for the purpose of raising revenue, tofund public expenditures while toll fees are collected by privatetoll way operators as reimbursement for the cost and expensesincurred in the construction, maintenance and operation of thetoll ways. As well as to assure them of a reasonable margin of income. The toll fees can be subjected to the VAT.

In connection with the principle on immunity of governmentfrom tax, in our study of the principles when the government

exercises governmental or sovereign function the exemptionapplies but when the government exercises proprietaryfunctions then the exemption will not apply. The rule is they aretaxable unless the law or charter creating these corporations orGOCCs grants the exemption.

How would we know that this type of service is a sovereign orgovernmental function?

Port operation – under the Philippine Ports Authority, the realproperties acquired or owned by the PPA (wharfs, piers, etc.) are

they subject to the real property tax? YES because portoperation is not a sovereign or governmental function.

You also have the case of MRT, LRT or PNR – they operate theserailway system. So etong mga carriages or stations nila orrailways are they subject to real property tax? Yes, they aretaxable for they perform proprietary functions. The only

exemption is when the law of the charter creating them, grantsthe exemption. Like in the case of SSS, GSIS – there is a lawgranting the exemption to them. NAPOCOR – does not have aproprietary function but in the charter creating it there was agrant that it would be exempted.

Manila International Airport Authority vs. City of Pasay (583SCRA 234) – Pasay City and Paranaque City assessed MIAA forreal property taxes. Now the MIAA operates the NAIA complexthis covers 600 hectares of land including runways, towers andother buildings. In 2001, MIAA received assessment notices forreal property taxes from Pasay City amounting 1 billion and the

MIAA did not pay the assessment claiming that they areexempted from the real property tax. The issue here waswhether the real properties of MIAA found in Pasay andParanaque City taxable or subject to real property tax. Nowthese 2 cases one by Pasay and one by Paranaque were alldecided by SC en banc. The MIAA according to the SC isexempted from the real property because it is not a GOCC but agovernment instrumentality. So the properties owned by MIAAare properties of public dominion owned by the State. That’swhy earlier you were presented with the principles we havelearned, how to we determine that activity is governmental orproprietary? The SC claimed that the MIAA is a government

instrumentality, being a public dominion and an instrumentalityvested with corporate powers in performing essential publicservices then the real properties are not taxable and thus, notsubject to real property tax.

The case of Mactan International Airport Authority vs. City of Cebu, it is the same context as the recent MIAA case. When theLGC took effect in 1991, the City of Cebu assessed the MactanInternational Airport for real property taxes – operation of thereal properties. The Mactan IAA claimed that they are exempted. The SC said NO for the Mactan IAA is exercising proprietaryfunction and the Mactan IAA is a GOCC. So, the exercise of



operating the airport is a proprietary function. Therefore, subjectto tax.

The SC did not abandon that ruling in Mactan IAA, it had adifferent ruling in the case of MIAA because the MIAA is agovernment instrumentality unlike the Mactan IAA which is aGOCC. Dun nagkaroon ng difference. Same ruling pa rin pero iba

ang situation ng MIAA.

Bar: If the examiner would ask the question what would be youranswer in the light of the two rulings, the advise was if binanggitnila ang taxpayer is MIAA then klaro yun na exempted pero kungsinabi lang kay Davao International Airport or Cebu then, withthe ruling of Mactan IAA.

*lumabas daw sa bar exam ang tax pyramiding*

Usual cases regarding the principles: TAX EXEMPTIONS, itsconstruction.

Taxation 1 Compilaton-ok

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