Taxation Part 2, Digests

8/6/2019 Taxation Part 2, Digests

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A. General Principles

CONCEPT, NATURE AND CHARACTERISTICS OF TAXATION AND TAXES

CIR v. Cebu Portland Cement Co. The Court of Tax Appeals ordered the Commission of Internal Revenue

(CIR) to refund to Cebu Portland Cement Co. about P350k+, w/crepresented overpayments of ad valorem taxes on cement producedand sold by it.

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

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

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

A petition for review was filed by CIR. I: W/n CIR must refund the overpayment of the ad valorem tax R: NO. CIR has the right to apply the overpayment to Cebu Portlands

sales tax deficiency. The sales tax was properly imposed upon the company for the reason

that cement has always been considered a manufactured product andNOT a mineral product. (CIR v Republic Cement)

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

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

The argument that the assessment cannot as yet be enforced becauseit is still being contested loses sight of the urgency of the need tocollect taxes as the lifeblood of the government.

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

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

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

1. deposit the amount claimed OR2. file a surety bond for not more than double the

amount with the Court.

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

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

Commissioner of Internal Revenue v. Algue The Phil. Sugar Estate Development Company (PSEDC) appointed

Algue, Inc., a family corporation, as its agent, authorizing it to sell itsland, factories, and oil manufacturing process.

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

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

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

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

The CIR questioned the deduction, claiming that it was not an ordinary,

reasonable, or necessary expense and was merely an attempt to evadepayment of taxes. I: W/n the P75,000 is tax-deductible as a legitimate business expense

of Algue, Inc. R: Yes, the P75,000 promotional fee is tax-deductible. Sec. 30 of the Tax Code provides that ordinary and necessary

expenses incurred during the taxable year in carrying on any trade orbusiness, including a reasonable allowance for salaries or othercompensation for personal services actually rendered are tax-deductible.

However, the burden in proving the validity of a claimed deductionbelongs to the taxpayer. In this case, the burden has beensatisfactorily discharged by the taxpayer Algue, Inc.

Algue, Inc. was able to prove that the promotional fees were notfictitious and were in fact paid periodically to the five family members.Moreover, the amount of the promotional fees was reasonable,considering that the five payees actually performed a service for Algue,Inc. by making the sale of the properties of PSEDC possible.

As a result of this sale, Algue, Inc. earned a net commission of P50,000. Taxes are what we pay for civilized society. Without taxes, the

government would be paralyzed for lack of the motive power toactivate and operate it.

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

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However, it should also be exercised reasonably and in accordance

with the prescribed procedure

. If it is not, the taxpayer has a right tocomplain to the courts.

C.N. Hodges v. Municipal Board of Iloilo

The Municipal Board of Iloilo enacted Ordinance No. 33 pursuant to theLocal Autonomy Act w/c:o required persons, firms, assocs and corps to pay a sales tax

of 1/2 of 1% of the selling price of any motor vehicle ANDo prohibited the registration of the sale of the motor vehicle

unless the tax had been paid Hodges, who was engaged in the buying and selling of second-hand

motors, questioned the validity of the tax for having been enacted inexcess of authority.

I: W/n the tax is valid. R: YES, the tax is valid. The Local Autonomy Act gives municipal boards the authority to enact

ordinances for the collection of taxes on any person engages in anyoccupation or business.

However, the LAA prohibits chartered cities, such as Iloilo fromimposing a tax on the registration of motor vehicles. Thus, the lowercourt ruled that to require payment of sales tax before registration istantamount to imposing a tax for the registration of motor vehicles.

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

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

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

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

CLASSIFICATIONS AND DISTINCTIONS

Association of Customs Brokers Inc. v. Municipal Board The Municipal Board of Manila passed an ordinance levying a property

tax on all motor vehicles operating within the City of Manila. The ordinance provided that the rate of the tax would be 1% ad

valorem per annum, and that the proceeds of the tax shall accrue tothe Streets and Bridges Funds of the City, w/c will be used for therepair, maintenance, and improvement of its streets and bridges.

The Charter of Manila gives the municipal board the power to taxmotor vehicles, but this is limited by the Motor Vehicles Law, whichdisallows the imposition of fees on motor vehicles, EXCEPT propertytaxes imposed by a municipal corp.

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

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

I: W/n ordinance is valid R: No, it is void. 1) It imposes a license tax, which the municipal corporation may not

impose, although it is made to appear as a property tax/ As a rule, an ad valorem tax is a property tax. However, if the tax is

really imposed upon the performance of an act, enjoyment of aprivilege, or the engaging in an occupation, it will be considered anEXCISE, even if its amount is determined in proportion to the value of the property used in connection with the occupation, privilege, or actwhich is taxed.

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

The reason for the prohibition is that under the Motor Vehicles Law,municipal corporations already get proceeds for the purpose of

repairing and maintaining their streets and bridges. The prohibitionaims at preventing a duplication in the imposition of fees for the samepurpose.

2) The ordinance infringes on the rule of uniformity of taxation becauseit exacts the tax upon ALL motor vehicles operating within the City of Manila, without distinguishing between those for hire and for privateuse, those registered in and those registered outside but occasionallycome to Manila.

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

Esso Standard Eastern Inc. v. CIR ESSO deducted from its gross income for 1959, as part of its ordinary

and necessary business expenses, the amount it had spent for drillingand exploration of its petroleum concessions.

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

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

I: W/n the margin fees are taxes OR necessary expenses which aredeductible from its gross income

R: No, they are neither taxes nor necessary expenses.



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1) Margin fees are NOT taxes because they are NOT imposed as arevenue measure but as a police measure whose proceeds are appliedto strengthen the countrys international reserves. Thus, the fee wasimposed by the State in the exercise of its POLICE POWER and NOTtaxation power.

2) Neither are they necessary and ordinary business expenses. An expense is considered NECESSARY where the expenditure is helpful

in the development of the taxpayers business. It is ORDINARY when it connotes a payment which is normal in relation

to the business of the taxpayer and the surrounding circumstances. The expenditure being ordinary and necessary is determined based onits nature the extent and permanency of the work accomplished bythe expenditure.

In this case, ESSO was unable to show that the remittance to the headoffice of part of its profits was made in furtherance of its own trade orbusiness.

It merely presumed that all corporate expenses are necessary andappropriate in the absence of a showing that they are illegal or ultravires; which is erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations.

Progressive Development Corp. v. QC The City Council of QC passed an ordinance known as the Market Codeof QC, which imposed a 5% supervision fee on gross receipts on rentalsor lease of privately-owned market spaces in QC.

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

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

I: W/n the supervision fee is an income tax or a license fee. R: It is a license fee. A LICENSE FEE is imposed in the exercise of the police power primarily

for purposes of regulation, while TAX is imposed under the taxing

power primarily for purposes of raising revenues. If the generating of revenue is the primary purpose and regulation is

merely incidental, the imposition is a tax; but if regulation is theprimary purpose, the fact that incidentally, revenue is also obtaineddoes not make the imposition a tax.

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

In this case, the Farmers Market is a privately-owned marketestablished for the rendition of service to the general public. It

warrants close supervision and control by the City for the protection of the health of the public by insuring the maintenance of sanitaryconditions, prevention of fraud upon the buying public, etc.

Since the purpose of the ordinance is primarily regulation and notrevenue generation, the tax is a license fee. The use of the grossamount of stall rentals as basis for determining the collectible amountof license tax does not, by itself, convert the license tax into a

prohibited tax on income. Such basis actually has a reasonable relationship to the probable costs

of regulation and supervision of Progressives kind of business, sinceordinarily, the higher the amount of rentals, the higher the volume of items sold.

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

PAL v. Edu Under a legislative franchise, Philippine Airlines is exempt from all

taxes except for the payment of 2% of its gross revenue to theNational Government.

On the strength of an opinion of the Secretary of Justice, PAL wasdetermined not to have been paying motor vehicle registration feessince 1956.

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

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

fees R: YES, PAL is exempt. The motor vehicle registration fee is a tax, to which PAL is exempt. Taxes are for revenue, while fees are exactions for purposes of

regulation and inspection. Thus, fees are limited in amount to what isnecessary to cover the cost of the services rendered in thatconnection.

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

In this case, the money collected under the Motor Vehicle Law is notintended for the expenditures of the Motor Vehicle Office but for theconstruction and maintenance of public roads, streets and bridges.

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

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

Villegas v. Hiu Chiong Tsai Pao Ho The Municipal Board of Manila passed an ordinance prohibiting an alien

from being employed or engaging in any position or occupation orbusiness enumerated therein, whether permanent, temporary, orcasual, without first securing an employment permit from the Mayorand paying the P50 permit fee.



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

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

I: W/n the ordinance is valid. R: NO, the ordinance is void. The first part of the ordinance requiring an alien to secure an

employment permit is regulatory in character because it involves theexercise of discretion on the part of the Mayor in approving ordisapproving the applications.

However, the second part which requires the payment of P50 asemployees fee is not regulatory but a revenue measure. There is nologic or justification in exacting P50 from aliens who have been clearedfor employment. The obvious purpose of the ordinance is to raisemoney under the guise of regulation.

The P50 fee is unreasonable not only because it is excessive butbecause it fails to consider valid substantial differences in situationamong individual aliens who are required to pay it. The same amount

is being collected from every employed alien, whether he is casual orpermanent, part time or full time, or whether he is a lowly employee ora highly paid executive.

Compania General de Tabacos v. City of Manila Tabacalera paid for its liquor license and also paid sales tax on its sale

of general merchandise, including liquor. It claimed that it made an overpayment and demanded a refund of the

sales tax paid on the ground that since it already paid the license fees,it was no longer bound to pay the sales tax on the liquor.

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

R: YES, Tabacalera is liable. Generally, the term tax applies to all kinds of exactions which

become public funds. Legally, however, a license fee is a legal conceptquite distinct from tax.

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

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

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

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

American Mail Lines v. City of Basilan

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

The anchorage fee was centavo per ton of the vessel for every 24 hoursor part thereof, provided that the maximum charge shall not exceed P75per day.

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

The City of Basilan argued that the ordinance was a valid exercise of thecitys police power and that the fees were for purely regulatory purposes. Itclaimed that since the City of Basilan was an island with mountainouscoasts and fringed by coves, bays and islets, there was a need for funds tosuppress possible smuggling activities.

I: W/n the ordinance was valid R: NO, the ordinance is void. The Charter of the City of Basilan gives the Council the authority to fix the

charges to be paid by all watercraft landing at or using public wharves,docks, levees, or landing places. The anchorage fees are not included inthis power, as shown by the need of the Council to enact the amendatory ordinance.

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

purposes. The power to regulate as an exercise of police power does NOT include the

power to impose fees for revenue purposes. Fees for purely regulatory purposes may only be of sufficient amount to

include:o expenses of issuing the license ANDo cost of the necessary inspection / police surveillance,o taking into account INCIDENTAL expenses

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

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

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

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

Osmea v. Orbos



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

o exchange rate adjustments ANDo increases in the world market prices of crude oil

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

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

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

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

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

channeled to another government objective. I: W/n the creation of the trust fund is violative of the Constitution R: NO, creation of the trust fund was valid. In order for the funds to fall under the prohibition, it must be shown

that they were collected as TAXES as a form of revenue While the funds collected may be referred to as taxes, they are

exacted in the exercise of the POLICE POWER of the State . The main objective was NOT revenue but to stabilize the price of oil

and petroleum. The OPSF is actually a SPECIAL FUND, as seen from the special

treatment given to it by EO 137. It is segregated from the general fund;and while it is placed in what the law refers to as a "trust liabilityaccount," the fund nonetheless remains subject to the scrutiny andreview of the COA.

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

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

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

o 1) complete in itself -- must set forth the policy to beexecuted by the delegate

o 2) it must fix a standard limits of whicharesufficiently determinate or determinable to which thedelegate must conform.

Such was fulfilled in this case.

Republic v. Bacolod-Murcia Milling Co.

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

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

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

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

Several years later, Insular Sugar Refinery had accumulatedtremendous losses.

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

They also contended that their obligation to pay their contributionssubsisted ONLY to the EXTENT that they were benefited by thecontributions, since the levy was merely a special assessment and nota tax.

I: W/n the levy was a special assessment or a revenue measure R: It was NEITHER!

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

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

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

Moreover, the charter of Philsugin authorizes it to conduct research inthe sugar industry in order to find ways to reduce the cost of production and achieve greater efficiency in the industry. Thisprovision justifies the acquisition of the refinery, since there is nobetter way to carry out this research than to actually operate arefinery.

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

TAX vs. SPECIAL ASSESSMENT:o The purpose of a special assessment is to finance the

improvement of particular properties , w/ the benefits of the improvement accruing to the owners thereof who pay theassessment.

o The purpose of an ordinary tax is to provide the Governmentwith revenues needed for the financing of state affairs .Refusal of a citizen to pay taxes may not be sanctioned



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because it would impair government functions. This wouldnot hold true in the case of a refusal to comply with a specialassessment.

Victorias Milling v. Municipality of Victorias The municipal council of Victorias enactedOrdinance 1 w/c required sugar centrals operating w/in the municipality to

pay an annual municipal license tax. Based on the ordinance, Victorias Milling wasassessed 40K (imposed on sugar centrals) and another 40K (imposed onsugar refineries). Thus, Victorias Milling filed a suit to declare theordinance void since it:

o a) exceeds the amount fixed in Provincial Circular 12-A issuedby the Finance Dept

o b) is discriminatory, as it singles out VM, w/c is the onlyoperator of a sugar central and a sugar refinery within the

jurisdiction of defendant municipalityo c) constitutes double taxationo d) the national government has preempted the field of

taxation with respect to sugar centrals or refineries The lower court held that the exaction was invalidbecause the municipality CANNOT impose a tax for revenue in the guise of a police measure. The amounts set forth in the ordinance also exceeded thecost of licensing, regulating, and surveillance. I: W/n the ordinance was valid. R: The ordinance was valid. The ordinance was promulgated not in the exerciseof the municipality's regulatory power but as a REVENUE measure,authorized by Commonwealth Act 472. Under this, a municipality is authorized to imposethree kinds of licenses:

o 1) license for regulation of useful occupations / enterpriseso 2) license for restriction/ regulation of non-useful occupations

or enterpriseso 3) license for revenue

The first 2 fall w/in police power, while the 3rd is forrevenue purposes. The license fee in this case falls under #3 and isvalid. Generally speaking, it is NOT a license fee, but restson taxing power, w/c must be expressly conferred by statute upon themunicipality. There is no double taxation because the company isbeing taxed for the same object: One tax is on sugar centrals and the otheris on sugar refineries. It just so happens that the company is both. [Also,the tax was imposed based on capacity of the sugar centrals to produce, soit was really a license on the occupation or business of sugar centrals and sugar refineries and not on the sugar itself; hence there was no identity of object of taxation].

There is no discrimination despite the fact that thecompany is the only sugar producing entity in the municipality. VictoriasMilling is not named in the ordinance and should another corporationdecide to produce sugar in the area, it will be taxed accordingly. GR: If not for police inspection, supervision,regulation = it is a revenue measure!

Lutz v. Araneta Commonwealth Act 567 or the Sugar AdjustmentAct, was promulgated in 1940 in response to the imminent threat tothe sugar industry by the imposition of export taxes upon sugar asprovided in the Tydings-McDuffie Act, and the eventual loss of itspreferential position in the US market. In order to stabilize the sugar industry to preparefor the loss, CA 567 provided for an INCREASE in the existing tax onthe manufacture of sugar (on a graduated basis), the proceeds of which would accrue to the Sugar Adjustment and Stabilization Fund (aspecial fund in the Phil Treasury). Walter Lutz, in his capacity as administrator of theEstate of Antonio Ledesma, wanted to recover from the Collector of Internal Revenue the amount paid by the estate as taxes, alleging thatthe tax imposed by CA 567 is unconstitutional, being levied for the aidand support of the sugar industry exclusively, which is NOT a publicpurpose. I: W/n the tax is unconstitutional because it is notdevoted to a public purpose. R: The tax is valid! The defect in the argument of Lutz is hisassumption that the tax provided for in CA 567 is a pure exercise of thetaxing power. In reality, the tax is levied with a regulatorypurpose, to provide means for the rehabilitation and stabilization of thethreatened sugar industry. Thus, it is primarily an exercise of policepower. Sugar production is one of the great industries of our nation. Sugar:

o Occupies the leading position among export productso

Gives employment to thousands of laborerso Is an impt source of foreign exchange Thus, its development redounds to GEN. WELFAREand the legislature may determine within reasonable bounds what isnecessary for its protection and promotion. Taxation may be made theimplement of the States police power. It is inherent in the power to tax that a state be freeto select the subjects of taxation, so the argument that the tax to belevied burdens sugar producers themselves does not hold water . It does not matter that the funds raised under theSugar Stabilization Act should be exclusively spent in aid of the sugarindustry, since it is that very enterprise that is being protected;



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legislature is not reqd by the Consti to adhere to the policy of all ornone. Lastly, the taxation does not constitute expenditureof tax money for private purposes, since the funds will be used toincrease sugar production, solve problems and improve workingconditions in sugar mills.

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

o EO 1 created the Presidential Commission on GoodGovernment (PCGG) to assist the President in the recovery of ill-gotten wealth accumulated by former Pres Marcos and hisfamily.

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

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

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

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

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

PCGG challenged the said resolution. Meanwhile, Sandiganbayan ordered the holding of elections for the

UCPB Board of Directors. It also allowed the sequestered shares to bevoted by their registered owners.

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

rights. Republic of the Phils then contended that the Sandiganbayan

committed GAD in enjoining the PCGG from voting the sequesteredshares of stock in the UCPB, despite the fact that:

o the sequestration shares were purchased with coconut levyfunds, which were PUBLIC in character, AND

o A previous resolution allowed the PCGG to vote thesequestered shares

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

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

Generally, the right to vote sequestered shares of stock registered inthe names of private individuals / entitles alleged to have been

acquired with ill-gotten wealth shall be exercised by the REGISTREDOWNERS.

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

o prima facie evidence that the shares are indeed ill-gotteno there is imminent danger of dissipation of the assets,

necessitating their continued sequestration and voting by thegovernment until a final decision on their ownership ispromulgated by the proper court

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

Based on this definition, a tax has 3 elements, namely that it is:o an enforced proportional contribution from persons and

propertieso imposed by the State by virtue of its sovereigntyo levied for the support of the government.

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

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

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

Commissioner on Internal Revenue v PLDT PDLT paid the BIR about P164k+ for equipment and spare parts it

imported for its business. The amount included compensating, advancesales and other internal revenue taxes. PLDT also paid VAT.

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

PLDT wrote to the BIR requesting confirmation of its exemptionprivilege, and BIR confirmed this, saying that PLDT was liable for the



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3% franchise tax and exempt from VAT on its importation of equipment.

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

CTA granted the petition (although ruling that a portion from Oct-Dec16, 1992 had already prescribed and was beyond the 2-yr period

allowed by law for refunds), ordering CIR to REFUND or to ISSUE infavor of petitioner a Tax Credit Certificate in the reduced amount of about P223k+ representing erroneously paid VAT and other taxes(compensating, advance sales, importation) from 1992 to 1994.

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

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

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

R: NO, PLDT is not exempt from VAT and other taxes Court has always ruled that TAXATION is the RULE, and exemption is

the exception. Thus, statutes granting tax exemptions must beconstrued strictly against the taxpayer and liberally in favor of thetaxing authority.

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

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

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

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

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

Direct taxes - impositions for which a taxpayer is directly liable on thetransaction or business he is engaged in

Indirect taxes - those where the liability for the payment of the tax fallson one person but the burden can be shifted or passed on to anotherperson, such as when the tax is imposed upon goods before reachingthe consumer who ultimately pays for it

o In this case, advance sales tax has the attributes of anindirect tax because the tax-paying importer of goods for saleor of raw materials to be processed into merchandise canshift the tax / lay the economic burden of the tax on the

purchaser, by subsequently adding the tax to the selling priceof the imported article or finished product

o Compensating tax also partakes of the nature of an excisetax payable by all persons who import articles, whether in thecourse of business or not. (Purpose: to place, for taxpurposes, persons purchasing from merchants in thePhilippines on a more or less equal basis with those who buy

directly from foreign countries)Planters Products Inc v Fertiphil

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

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

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

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

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

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

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

2. W/n the levy was for a public purpose - NO R: 1. The imposition of the levy was a exercise of the taxation power of

the state. While it is true that the power to tax can be used as an implement of

police power, the primary purpose of the levy was revenue generation.If the purpose is primarily revenue, or if revenue is, at least, one of thereal and substantial purposes, then the exaction is properly called atax.

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

Even if it was an exercise of the police power of the state, the LOIwould still be invalid as it did not comply with the test of lawfulsubjects and lawful means -- specifically, that the interest of thepublic, generally, requires its exercise, and that the means employedare reasonably necessary for the accomplishment of the purpose andnot unduly oppressive upon individuals.

2. LOI 1465 is not for a public purpose. The purpose for the issuance of LOI 1465 was to support a private

company:o First, it is expressly provided that the levy be imposed to

benefit a private company PPI.



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o Second, the levy was conditional and dependent on PPIbecoming financially viable.

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

LIMITATIONS ON THE POWER OF TAXATION

Pascual v Secretary of Public WorksCongress passed an RA appropriating P85K for the construction of Pasigfeeder road terminals.

The Provincial Governor of Rizal filed an action for declaratory relief andinjunction, claiming that at the time of the passage and approval of theAct, these feeder roads had not yet been constructed and were notconnected to any government property or main highway. The feederroads were actually within the Antonio Subdivision, which was owned by

Jose Zulueta, a member of the Senate of the Philippines. Zulueta, beforethe passage of the Act, had offered to donate the property to themunicipality of Pasig, but the deed of donation was executed only severalmonths after the RA was passed. Hence, Congress appropriated publicfunds for the construction of feeder roads that were, at the time the lawwas passed, private property.ISSUE: Whether the appropriation is valid.HELD: The appropriation is invalid.

The taxing power must be exercised for public purposes only and not forthe advantage of private individuals. The right of the legislature toappropriate public funds is correlative with its right to tax. As theConstitution prohibits taxation except for a public purpose, so also noappropriation of state funds can be made other than for a public purpose.

The test of the constitutionality of a statute requiring the use of publicfunds is whether the statute is designed to promote the public interests asopposed to the furtherance of the advantage of individuals, although suchadvantage to individuals might incidentally serve the public.Even if subsequently, Zulueta executed the deed of donation in favor of the municipality, making the roads public property, the appropriation isstill invalid. The validity of the statute depends upon the powers of Congress at the time of its passage, not upon events occurring after. Atthe time the bill was passed, the road was still private property.

Therefore, the appropriation sought a private purpose and was null andvoid. The subsequent donation could not have cured this nullity.

Osmena v Orbos Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund

(OPSF), which was designed to reimburse oil companies for costincreases in crude oil and imported petroleum products resulting from:

o exchange rate adjustments ANDo increases in the world market prices of crude oil

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

Subsequently, by virtue of an EO, the OPSF was reclassified into a trustliability account and ordered released from the NATIONAL TREASURY to

the MINISTRY of Energy. Said EO also authorized the investment of thefund in government securities, with the earnings accruing to the fund.

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

Osmena then questioned the creation of the trust fund, saying that itviolates the Constitution. This is because the money collected pursuant to PD 1956 is a special

fund, and under the Constitution, if a special tax is collected for aspecific purpose, the revenue generated from it shall be treated as aSPECIAL FUND to be used only for the indicated purpose. It must not bechanneled to another government objective.

I: W/n the creation of the trust fund is violative of the Constitution R: NO, creation of the trust fund was valid. 1. For the funds to fall under the prohibition, it must be shown that

they were collected as TAXES as a form of revenue While the funds collected may be referred to as taxes, they are

exacted in the exercise of the POLICE POWER of the State . The main objective was NOT revenue but to stabilize the price of oil

and petroleum.

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

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

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

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

o 1) complete in itself -- must set forth the policy to beexecuted by the delegate

o 2) it must fix a standard limits of which aresufficiently determinate or determinable to which thedelegate must conform.

In this case, there was a sufficient standard, which is the general policyof the law to protect the consumer by stabilizing and subsidizingpetroleum prices.

Pepsi-Cola v Municipality of Tanauan This case involved 2 Municipal Ordinances and the Local Autonomy Act

(RA 2264):o The Local Autonomy Act (RA 2264) grants municipalities the

authority to impose municipal taxes or fees upon personsengaged in any occupation or business within their

jurisdictions, provided that they were not allowed to imposepercentage tax on sales and on items already subject tospecific tax under the NIRC



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

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

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

I: W/n RA 2264 constitutes an undue delegation of power - NO 2. Whether MOs 23 and 27 are valid YES! R: 1. RA 2264 is not an undue delegation of power. The power of taxation may be delegated to local governments in

respect of matters of local concern. This is not to say though that the constitutional injunction against

deprivation of property without due process of law may be passed overunder the guise of the taxing power, except when the taking of property is in the lawful exercise of the taxing power, as when:

o the tax is for a public purpose;o the rule on uniformity of taxation is observed;o

either the person or property taxed is within the jurisdictionof theo government levying the tax; ando in the assessment and collection of certain kinds of taxes,

notice and opportunity for hearing are provided. The delegation of the taxing power to the municipal corporation cannot

be assailed either on the ground of double taxation. Double taxation isprohibited only when the taxpayer is taxed twice for the same benefitby the same entity for the same purpose, not where one tax is imposedby the State and the other by a municipality.

2. The MOs are valid. MO No. 27 is not a tax on sales but on the produce, since it is based on

volume capacity. Neither is it a specific tax because soft drinks do not fall within the

enumeration of items subject to specific tax. The rate of the tax is alsoreasonable and cannot be said to be unfair or oppressive.

Municipalities are empowered to impose, not only municipal licensetaxes

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

SSS v City of Bacolod The SSS had an office building in Bacolod City. It failed to pay realty

taxes for three consecutive years. The City levied upon the propertyand forfeited it in its favor.

SSS protested the forfeiture on the ground that the SSS, being agovernment owned and controlled corporation, is exempt frompayment of real estate taxes.

The CFI ruled that SSS is NOT covered by the exemption, saying thatthe exemption only applies to properties owned by governmentagencies and instrumentalities performing governmental/ sovereignfunctions.

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

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

R: Yes. The SSS is exempt from paying realty taxes. The Charter of the City of Bacolod provides that lands and buildings

owned by the government are exempt from realty taxes. The application of the NACOCO v. Bacani case is incorrect, since that

case was referring to legal fees and NOT to realty taxes. For purposes of exemptions in the payment of realty taxes, the

distinction between government agencies performing constituent andministrant function is not important.

What is decisive is merely that the properties possessed by the SSSare in fact owned by the government of the Philippines. As such, they

are exempt from realty taxes. To make such a distinction would have the effect of taking money from

one pocket and putting it in another pocket. It would not serve themain purpose of taxation and would even tend to defeat it, because of the paperwork, time, and expenses that it would entail.

When public property is involved, exemption is the rule andtaxation, the exception

Manila Intl Airport Authority v City of Pque As operator of the NAIA, the Manila Intl Aiport (MIAA) administers the

land, improvements and equipment within the NAIA complex. The MIAA charter transferred to the MIAA approximately 600 hectares

of land, including runways and buildings. The charter also providedthat no portion of the land transferred to the MIAA shall be disposed of through sale or any other mode unless approved by the President.

The Office of the Government Corporate Counsel was of the opinionthat the local government code withdrew the exemption from realestate tax granted to MIAA.

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

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

MIAA filed a petition for injunction but CA dismissed this.



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MIAA. A day before the scheduled public auction, the MIAA filed amotion for an issuance of a TRO before the SC which the SC grantedimmediately.

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

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

Held: YES, it is. 1. A GOCC is NOT exempt from real estate tax. However, MIAA is NOT a GOCC. A GOCC must be organized as a stock

or non-stock corporation. MIAA is not organized as a stock or non-stockcorporation.

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

A government instrumentality like MIAA falls under the LGC w/c statesthat local govs CANNOT tax the national government, w/c delegatesthe power to tax to local govs. The power of local govs to tax is subjectto Congress limitations.

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

roads, ports owned by state). Thus, they are outside the commerce of man and CANNOT be thesubject of sale. Unless the President issues a proclamation withdrawingthe Airport lands and Buildings from public use, these propertiesremain properties of public dominion and are inalienable.

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

The transfer of the said property to the M IAA was meant to implement a reorganization. The MIAA charter transferred Airport lands and buildings to MIAA without the Republic receiving any cash. The

purpose was to reorganize a division in the Bureau of Air Transportation into a separate and autonomous body. The Republicremains the beneficial owner of the lands and buildings.

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

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

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

Sea-Land Services Inc. v. CA: International Comity Sea-Land, an American shipping company, entered into a contract with

the US Government for the transport of military household goods andeffects of US military personnel assigned to the Subic Naval Base.

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

Later, Sea-Land asked for a refund, claiming that it had paid the tax by

mistake. It invoked the tax exemption provided in the RP-US MilitaryBases Agreement, which exempts from tax any profit derived by a USnational under a contract with the US government in connection withthe construction, maintenance, operation, and defense of the bases.

Sea-Land filed a petition for review with the CTA to judicially pursue itsclaim for refund and to stop the running of the 2-year prescriptiveperiod.

CTAs & CA denied refund. I: W/N Sea-Land falls within the coverage of the tax exemption. NO R: The transport or shipment of household goods and effects of

USmilitary personnel is not included in the term construction,maintenance, operation, and defense of the bases. Neither can theactivity be interpreted as directly related to the defense and security of the Philippine territories. It is therefore not covered by the exemption.

Laws granting exemption from tax are construed strictissimi jurisagainst the taxpayer and liberally in favor of the taxing power.

Taxation is the rule and exemption is the exception. The law doesnot look with favor on tax exemptions and that he who would seek tobe thus privileged must justify it by words too plain to be mistaken andtoo categorical to be misinterpreted.

The avowed purpose of tax exemption is some public benefit orinterest, which the lawmaking body considers sufficient to offset themonetary loss entailed in the grant of the exemption. The hauling ortransport of household goods and personal effects of U. S. militarypersonnel would not directly contribute to the defense and security of the Philippines.

CIR v. Mitsubishi Metal Corp.: International Comity



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Atlas Consolidated Mining entered into a Loan and Sales Contract withMitsubishi. Under the Contract, Mitsubishi would lend Atlas $20M forthe installation of a new concentrator for copper production, and inturn, Atlas would sell to Mitsubishi all the copper concentratesproduced from the machine for the next 15 years.

Thereafter, Mitsubishi applied for a loan with Eximbank of Japan andother consortium of Japanese banks so that it could comply with its

obligations under the contract. The total amount of both loans was$20M. Approval of the loan by Eximbank to Mitsubishi was subject to the

condition that Mitsubishi would use the amount as loanto Atlas and asconsideration for importing copper concentrates from Atlas.

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

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

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

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

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

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

Thus, the interest income of the loan paid by Atlas to Mitsubishi isentirely different from the interest income paid by Mitsubishi to

Eximbank. What was subject of the withholding tax is not the interestincome paid by Mitsubishi to Eximbank but the interest income earnedby Mitsubishi from the loan to Atlas.

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

It is true that under the contract of loan with Eximbank, Mitsubishiagreed to use the amount as a loan to and in consideration forimporting copper concentrates from Atlas, but this only proves the

justification for the loan as represented by Mitsubishi which is astandard banking practice for evaluating the prospects of duerepayment.

Laws granting exemption from tax are construed strictissimi jurisagainst the taxpayer and liberally in favor of the taxing power.

While international comity is invoked in this case on the nebulousrepresentation that the funds involved in the loans are those of aforeign government, scrupulous care must be taken to avoid openingmeans to violate our tax laws. Otherwise, the mere expedient of having Phil corp enter into a contract for loans with private foreignentities, which in turn will negotiate independently with theirgovernments, could be availed to take advantage of the tax exemption

law under discussion.

31 st Infantry Post Exchange v. Posadas: InternationalComity

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

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

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

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

The Exchange claims that the merchants should be exempt from taxessince the revenue law provides that no specific tax shall be collectedon any goods sold and delivered directly to the US Army of Navy fortheir actual use or issue.

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

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

The rule is that without Congressional consent, no Federal agency orinstrumentality can be taxed by state authority. However, only thoseagencies through which the Federal Government immediatelyand directly exercises its sovereign powers are immune fromthe taxing power of the states.

The reason upon which the rule rests must be the guiding principle tocontrol its operation. The limitations upon the taxing power of the state



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must receive a practical construction which does not seriously impairthe taxing power of the Government imposing the tax.

The effect of the tax upon the functions of the Government and thenature of the governmental agency determine finally the extent of theexemption.

In this case, the tax laid upon Philippine merchants who sell to theExchange does not interfere with the supremacy of the US Government

or with the operations of its instrumentality the US Army, to such anextent or in such a manner as to render the tax illegal. The tax doesnot deprive the Army of the power to serve the Government or hinderthe efficient exercise of its power.

CIR v. Marubeni Corporation Marubeni was a Japanese corporation engaged in the import and

export, trading, and construction business. It completed two contractsin 1984, the income from which it did not declare.

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

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

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

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

Marubeni filed a petition with the CTA, arguing that the income derivedfrom the offshore portion should be exempt from tax since it was

derived outside of the Philippine jurisdiction. I: W/N income of Marubeni is taxable even if it claims that it was

earned outside of the Philippines. NO, Marubeni is NOT liable for thecontractors tax.

R: A contractors tax is in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale of products. Itis directly collectible from the person exercising the privilege. Being anexcise tax, it can be levied by the taxing authority only when the acts,privileges or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on anoccupation or privilege outside the taxing district.

In this case, the ship loaders, boats and mobile equipment used in theconstruction projects were all designed, engineered and fabricated in

Japan. They were merely shipped to Leyte and assembled there. Whilethe construction and installation work were completed within thePhilippines, some pieces of equipment and supplies were completelydesigned and engineered in Japan. Since these services were renderedoutside the taxing jurisdiction of the Philippines, they are therefore notsubject to the contractors tax.

Reagan v. CIR: Territorial Jurisdiction Reagan, an American citizen and an employee Bendix Aviation

Corporation, which provides technical assistance to the US Air Force,was assigned at Clark Air Base. He imported a tax-free 1960 Cadillaccar.

After a few months, he asked his Base Commander at the Clark AirBase for a permit to sell the car which was granted provided that thesale should be made to a member of the US Armed Forces or a UScitizen employed in the US military base in the Philippines. He thensold the car to

, Jr. who was a member of the US Marine Corps in Cavite. Johnson, Jr.then sold the car to Meneses.

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

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

I: W/N the sale is exempt from income tax. NO R: The sale is not exempt from income tax because it took place within

Philippine territory thus within the governments jurisdictional power totax.

Clark Air Force Base is not a foreign soil or territory for purpose of

income tax legislation. There is nothing in the Military BasesAgreement that lends support to such assertion. It has not becomeforeign soil or territory. The Philippines jurisdictional rights therein,certainly not excluding the power to tax, have been preserved.

The Phils being independent and sovereign, its authority may beexercised over its entire domain. There is no portion thereof that isbeyond its power. Its laws govern therein, and everyone to whom itapplies must submit to its terms. The ground occupied by an embassyis not in fact the territory of the foreign State to which the premisesbelong through possession or ownership. The lawfulness orunlawfulness of acts there committed is determined by the territorialsovereign.

A state is not precluded from allowing another power to participate inthe exercise of jurisdictional right over certain portions of its territory.



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If it does so, it does not follow that such areas become impressed w/alien character. They retain their status as native soil. They are stillsubject to its authority. Itts jurisdiction may be diminished, but it doesnot disappear. So it is with the bases under lease to the Americanarmed forces by virtue of the Military Bases Agreement of 1947. Theyare not and cannot be foreign territory.

Tiu v. CA: Equal Protection of the Laws Congress passed RA 7227 which created the Subic Special EconomicZone, granting tax and duty incentives (tax and duty-free importationsof raw materials, capital and equipment) to businesses and residentswithin the area encompassed by the zone.

The law provides that no local and national taxes shall be imposedwithin the zone. In lieu of taxes, 3% of the gross income of enterprisesoperating within the zone shall be remitted to the NationalGovernment, 1% to the local government units, and 1% to adevelopment fund to be utilized for the development of municipalitiesoutside Olangapo and Subic.

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

o EO97

tax and duty-free importations will only apply to

raw materials, capital goods and equipment broughtin by business enterprises into the SSEZ.Except for import tax and duties, all business arerequired to pay the specified taxes in Section 12(c)of RA7227.

o EO97-A the tax incentives are only applicable to businessenterprises and individuals residing within the secured area.

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

They assert that the SSEZ encompasses (1) the City of Olongapo, (2)the Municipality of Subic in Zambales, and (3) the area formerlyoccupied by the Subic Naval Base. However, EO 97-A, according tothem, narrowed down the area within which the special privilegesgranted to the entire zone would apply to the present fenced-in

former Subic Naval Base only. It has hereby excluded the residents of the first two components of the zone from enjoying the benefitsgranted by the law.

I: W/N the EO confining the application of the privileges under RA 7227within the secured area and excluding the residents of the zoneoutside the secured area violates the equal protection clause. NO.

R: There are real and substantive distinctions between thecircumstances obtaining inside and outside the Subic Naval base,thereby justifying avalid and reasonable classification.

For a valid classification, the following requisites must be present:1. it must rest on substantial differences;2. must be germane to the purpose of the law;3. must not be limited to existing conditions only; and

4. must apply equally to all members of the same class. In this case, the purpose of the law is to accelerate the conversion of

military reservations into productive areas (economic or industrialareas) . Thus, the lands covered under the Military Bases Agreementare its object.

To achieve purpose, Congress deemed it necessary to extendeconomic incentives to attract and encourage investors. It was thus

reasonable for the President to have delimited the application of someincentives to the confines of the former Subic military base, since it isthis specific area which the government intends to transform anddevelop into a self-sustaining industrial and economic zone,particularly for the use of big foreign and local investors to use asoperational bases for their businesses and industries. These biginvestors possess the capital necessary to spur economic growth andgenerate employment opportunities.

There are substantial differences between the big investors who arebeing lured to establish and operate their industries in the so-calledsecured area and the present business operators outside the area.

Big investors lured into secured areas Present biz operators outside the are-billion-peso investments & thousandof new jobs-national economic impact-

-no such magnitude-only local economic impact-biz activities outside secured areasare not likely to have any impact inachieving purpose of law which is toturn former military base toproductive use for the benefit of thePhil economy

There is, then, hardly any reasonable basis to extend to them thebenefits and incentives accorded in RA 7227

John Hay Peoples Alternative Coalition v. Lim RA No. 7227 created the Bases Conversion and Development Authority

(BCDA), which also created the Subic Special Economic Zone (SubicSEZ). Aside from granting incentives to Subic SEZ, RA 7227 alsogranted the President is an express authority to create other SEZs inthe areas covered respectively by the Clark military reservation, theWallace Air Station in San Fernando, La Union, and Camp John Haythrough executive proclamations.

BCDA entered into a MOA and Escrow Agreement with TUNTEX andASIAWORLD, private corporations under the laws of the British VirginIslands, preparatory to the formation of a joint venture for thedevelopment of Poro Point La Union and Camp John Hay as premiertourist destinations and recreation centers.

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



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President Ramos issued Proclamation No. 420 which established a SEZon a portion of Camp John Hay. 2 nd sentence of Section 3 of saidProclamation provided for national and local tax exemption within andgraned other economic incentives to the John Hay Special EconomicZone.

Section 3: Investment Climate in John Hay Special Economic Zone.-

Pursuant to Section 5(m) and Section 15 of RA No. 7227, the John HayPoro Point Development Corporation shall implement all necessarypolicies, rules, and regulations governing the zone, includinginvestment incentives, in consultation with pertinent governmentdepartments. Among others, the zone shall have all theapplicable incentives of the Special Economic Zone underSection 12 of Republic Act No. 7227 and those applicableincentives granted in the Export Processing Zones, the OmnibusInvestment Code of 1987, the Foreign Investment Act of 1991, and newinvestment laws that may hereinafter be enacted.

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

o For being illegal and invalid in so far as it grants taxexemptions thus amounting to unconstitutional exercise of bythe President of power granted only to legislature

o Limits powers and interferes with the autonomy of the cityo Violates rule that all taxes should be uniform and equitable

I: W/N Proclamation No. 420 is constitutional by providing for nationaland local tax exemption within and granting other economic incentivesto the John Hay Special Economic Zone. NO, 2 nd sentence, Section 3 of said proclamation is unconstitutional.W/N Proclamation No. 420 is constitutional for limiting or interferingwith the local autonomy of Baguio City. YES

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

Under Section 12 of RA No. 7227 it is clear that ONLY THESUBIC SEZ which was granted by Congress with tax exemption,investment incentives and the like. THERE IS NO EXPRESSEXTENSION OF THE SAID PROVISION IN PRESIDENTIALPROCLAMATION No. 420. (Section 12 kept mentioning Subic SpecialEconomic Zone, specifically) Also found in the deliberations of the Senate, a confirmation of the exclusivity of the tax andinvestment privileges to Subic SEZ. Senator Angara: TheGentleman is absolutely correct. Mr. President. SO WE MUSTCONFINE THESE POLICIES ONLY TO SUBIC.

It is the legislature, unless limited by a provision of the stateconstitution that has full power to exempt any person, corporation orclass of property from taxation, its power to exempt being as broad asits power to tax. Other than the Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass

ordinances on exemption only from local taxes. The challenged grantof tax exemption must have concurrence of a majority of all membersof Congress. In same vein, the other kinds of privileges extended to the

John Hay SEZ are by tradition and usage for Congress to legislate upon. Tax exemption cannot be implied as it must be categorically and un

mistakably expressed if it were the intent of the legislature to grantto the John Hay SEZ the same tax exemption and incentives given to

Subic SEZ, it would have so expressly provided in RA 7227. BCDA, under R.A 7227, is expressly entrusted with broad rights of ownership and administration over Camp John Hay, as the governingagency of the John Hay SEZ.

COCONUT OIL REFINERS ASSOCIATION INC. V. BCDA RA 7227 was enacted providing for the sound and balanced conversion

of the Clark and Subic military reservations and their extensions intoalternative productive uses in the form of special economic zones.

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

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

Petitioner assail:o EO 80 and BCDA Board Resolution: allowing the tax and duty-

free sale at retail of consumer goods imported via clark forconsumption outside CSEZ.

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

Petitioners argue that the Executive Department, by allowing thruquestioned issuances the setting up of tax and duty free shops and theremoval of consumer ggoods and items from the zones withoutpayment of correspondning duties and taxes arbitrarily providedadditional exemptions to the limitations imposed by RA 7227.

I: (other issues: equal protection clause, preferential use of Filipinolabor, prohibition against unfair competition)W/N assailed issuances amounts to violation of the rule on separationof powers being executive legislation.

R: Petitioners claim that the wording of RA 7227 clearly limits the grant of

tax incentives to the importation of raw materials and capitalequipment only, hence they claim that assailed issuances constituteexecutive legislation for invalidly granting tax incentives in importationof consumer goods. The court however said that to limit the tax-freeimportation privilege of enterprises to those located inside the specialzone only to raw materials clearly runs counter to the intention of thelegislature to create a free port where free flow of goods or capitalwithin, into and out of the zones is insured.

The records of the Senate containing the discussion of the concept of SEZ in Sec 12a RA 7227 show the legislative intent that consumergoods entering the SSEZ which satisfy the needs of the zone and are



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consumed there are not subject to duties and taxes in accordance withPhilippine laws. According to Senator Guingona: The SEZ couldembrace the needs of tourism, servicing, financing and otherinvestment aspects.

However with regard to the executive order issued by President Ramosconcerning Clark as being a SEZ (and thus enjoy tax exemptions andincentives) the court declared that such was an invalid exercise of

executive legislation. As was decided in the case of Camp John Jay,wherein the court held that John Hay was not granted any taxexemption as it was not anywhere stated in the law. As in this case, RA7227 expressly provides for the grant of incentives to the SSEZ it failsto make any similar grant however to the other economic zonesincluding Clark. Tax and duty free incentives being in the nature of taxexemptions the basis thereof should be categorically and unmistakablyexpressed from the language of the statute.

Province of Abra v Hernando The Roman Catholic Bishop of Bangued wanted to be exempted from

payment of real estate tax. He filed an action for declaratory relief in the CFI of Abra. The CFI rendered a summary judgment granting the exemption. The Province of Abra filed an action for certiorari against the CFI on the

ground that it granted the action for declaratory relief filed by theRoman Catholic Bishop without allowing the Province to answer andwithout hearing, in violation of its right to due process.

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

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

R: NO, it is invalid In order to exempt religious institutions from the payment of real

estate taxes, the property must be used exclusively, actually, anddirectly for religious purposes.

Thus, To be exempted from realty tax, there must be proof of ACTUALand DIRECT use of the property for religious or charitable purposes. In this case, the right of the Province of Abra to procedural due process

was violated by the summary judgment granting the exemption. Instead of accepting the bare allegation of the bishop that the property

was being used exclusively, directly, and actually for public purposes,the judge should have first required proof of these allegations.

Tolentino v. Sec. of FinanceSeveral parties filed complaints in the SC questioning the legality of ExpandedVAT law (RA 7716), which sought to widen the tax base of the existing VATsystem

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

1) The Philippine Press Institute contends that by removing VATexemption from the press while maintaining those granted to others,the EVAT Law discriminates against the press and violates the freedomof the press.

R: Since the law granted the press a privilege, the law could take backthe privilege anytime WITHOUT offense to the Constitution.

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

The case of Grosjean v. American Press Co. cited by the PPI is differentbecause in that case, the tax was found to be discriminatory because itwas imposed only on newspapers whose weekly circulation was overP20k. These papers were critical of a certain senator who controlledthe state legislature. The censorial motivation of the law was thusevident. HOWEVER, in this case, the motivation was not to censor butmerely to raise revenues.

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

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

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

It also claims exemption from the registration fee of P1k. R: The resulting burden on the exercise of religious freedom is so

INCIDENTAL as to make it difficult to differentiate it from any othereconomic imposition that might make the right to disseminate religiousdoctrines costly.

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

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

3. CREBA claims that the law: a) impairs the obligations of contracts because the application of the

tax to existing contracts of the sale of real property by installmentwould result in substantial increases in monthly amortizations, whichthe buyer did not anticipate at the time he entered into the contract.



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

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

R: a) VAT does NOT violate the non-impairment clause because the

obligation of contracts CANNOT defeat the authority of the governmentto tax by virtue of its sovereignty.

b) Neither did it violate EPC because there was a substantial distinctionbetween the homeles

Taxation Part 2, Digests

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Transcript of Taxation Part 2, Digests