TAX LAW AND JURISPRUDENCE Vitug and Acosta PART I – GENERAL PRINCIPLES A.
Concept
Taxation - mode by which governments make exactions for revenue in order to support their existence and carry out their legitimate objectives. - may refer to either or both the power to tax or the act or process by which the taxing power is exercised
Legislative taxing power includes authority: To determine the: • Nature (kind) • Object (purpose • Extent (amount or rate) • Coverage (subjects and objects) • Situs (place) of tax imposition To grant tax exemptions or condonations To specify or provide for the administrative, as well as judicial remedies that either the government or the taxpayers may avail themselves of in the proper implementation of the tax measure.
Governmental necessity – theory or underlying basis of taxation
Exemptions in tax delegation: To local governments (to be exercised by the local legislative bodies thereof) or political subdivisions When allowed by the Constitution; or When the delegation relates merely to administrative implementation that may call for some degree of discretionary powers under a set of sufficient standards expressed by law
Commissioner vs. Pineda (21 SCRA 105) “Taxes are the lifeblood of the Government and their prompt and certain availability are an imperious need.” Vera vs Fernandez (89 SCRA 199) “Upon taxation depends the Government’s ability to serve the people whose benefit taxes are collected.” Commissioner vs. Algue, Inc. (158 SCRA 9) “Taxation is the indispensable and inevitable price for civilized society; without taxes, the government would be paralyzed.” Mun. of Makati vs CA (190 SCRA 206) “Revenues derived from taxes are intended primarily to finance the government and its activities and are thus exempt from execution.” B.
Principles of a Sound Tax System
1.
Fiscal Adequacy
The sources (proceeds) of tax revenue should coincide with and approximate the needs of government expenditures. 2.
Theoretical Justice
The tax system should be fair to the average taxpayer and based upon his ability to pay. 3.
Administrative Feasibility
The tax system should be capable of being properly and efficiently administered by the government and enforced with the least inconvenience to the taxpayer. C.
Scope and Limitation of Taxation
SCOPE OF TAXATION TAXATION IS: Unlimited, Far-reaching, Plenary Comprehensive Supreme INHERENT LIMITATIONS 1.) Taxation must be for a Public purpose The proceeds of the tax must be used: o for the support of the State or o some recognized objects of government or directly to promote the welfare of the community. The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. It is inherent in the power to tax that a state be free to select the subject of taxation, and it has been repeatedly held that “inequities” which result from a singling out of one particular class for taxation or exemption infringes no constitutional limitation. Taxation has been made the implement of the state’s police power. 2.) Taxation is inherently legislative
It is also legislative in character and a legislative prerogative. (NAPOCOR vs Albay) These powers are not inherent in, but merely delegated by constitutional mandate or by law to, local governments.
Taxation may exceptionally be delegated under the following well-settled limitations: The delegation shall not contravene any constitutional provision or the inherent limitations of taxation; The delegation is effected either by the Constitution or by validly enacted legislative measures or statue; and The delegated levy power, except when the delegation is by an express provision of the Constitution itself, should only be in favor of the local legislative body of the local or municipal government concerned. The power of taxation may be delegated to local governments in respect of matters of local concern. In delegating authority, the State is not limited to the exact measure of the power which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects, which for reasons of public policy the State has not deemed wise to tax for general proposes (Pepsi Cola vs. Mun. of Tanauan 69 SCRA 460). The assessment and collection of taxes duly levied are executive or administrative functions, and these aspects of taxation are not covered by the non-delegation rule. 3.) Taxation is territorial.
Taxation may be exercised only within the territorial jurisdiction of the taxing authority (determination of “place of taxation” or tax situs).
Poll Taxes – residence of the taxpayer Property Taxes – where the property is situated
Excise Taxes o Where the privilege is exercised o Where the taxpayer is a national o Where he has residence
4.) Taxation is subject to international comity.
The Philippine Constitution, indeed, has expressly adopted the generally accepted principles of international law as part of the law of the land. Principle of sovereign equality among states Principle of their freedom from suit without their consent, that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken, in that capacity.
The constitutional injunction against deprivation of property without due process of law may not be passed over under
guise of the taxing powers, except when the taking of the property is in the lawful exercise of the taxing power, as when: The tax is for public purpose The rule on uniformity of taxation is observed Either the person or property taxed is within the jurisdiction of the government levying the tax In the assessment and collection of certain kinds of taxes, notice and opportunity for hearing are provided Therefore, the due process clause can be said to be the constitutional basis for these inherent limitations. CONSTITUTIONAL LIMITATIONS A. Direct 1) Due process • Should not be harsh, oppressive, or confiscatory (Substantive) • By authority of valid law (Substantive) • Must be for a public purpose (Substantive) • Imposed within territorial jurisdiction (Substantive) • No arbitrariness in assessment and collection (Procedural) • Right to notice and hearing (Procedural) 2) Equal protection • All persons subject to legislation shall be treated alike, under like circumstances and conditions both in privileges conferred and liabilities imposed. • Power to tax includes power to classify provided: a. Based on substantial distinction b. Apply to present and future conditions c. Germane to purpose of law d. Apply equally to all members of the same class 3) Non-impairment clause Rules (a) When government is party to contract granting exemption cannot be withdrawn without violating non-impairment clause (b) When exemption generally granted by law withdrawal does not violate (c) When exemption granted under a franchise may be revoked because the constitution provides that franchise is subject to amendment, alteration, or repeal by Congress. 4) Must be uniform and equitable (Art VI, Sec 28, par 1) Uniform - all articles or properties of the same class taxed at same rate Tax operates with the same force and effect in every place where the subject may be found Classification is permitted: 1) If the standards used therefor are not arbitrary but reasonable and substantial 2) If the classification is germane to achieve the purpose of the legislation 3) If that classification applies to both present and future conditions, other circumstances being equal 4) If the classification applies equally to all those belonging to the same class
Equity - apportionment must be more or less just in the light of taxpayer’s ability to shoulder tax burden Means fair, just, reasonable and proportionate to one’s ability to pay.
5) Non-imprisonment for non-payment of poll tax No person shall be imprisoned for non-payment of a poll tax (Art II, Sec 20) • Poll Tax/Community Tax – one levied on persons who are residents within the territory of the taxing authority without regard to their property, business or occupation. Taxpayer may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides.
An imposition of a fine (but no subsidiary imprisonment) or even imprisonment for any violation other than nonpayment would not be unconstitutional. 6) Congress shall evolve a progressive system of taxation (Art VI, Sec 28, par 1) As resources of the taxpayer becomes higher, his tax rate likewise increases (ex. Income tax) Constitution does not prohibit regressive taxes; this is a directive upon Congress, not a justiciable right. 7) All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments • It is the bill, not the law that must originate from House; bill may undergo extensive changes in Senate • Rationale: members of House are more sensitive to local needs. 8) Charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and all lands, buildings and improvements ACTUALLY, DIRECTLY and EXCLUSIVELY USED for charitable, religious and educational purposes shall be exempt from taxation (Art VI, Sec 28, par 3) • Pertains only to real estate tax. • Test of exemption: actual use of the property, not ownership • Use of word “exclusively” means “primarily” rather than “solely.” • Exemption extends to property incidental to or reasonably necessary for the accomplishment of the purposes mentioned. 9) Tax exemption of all revenues and assets of a. non-stock, non-profit educational institutions b. used ACTUALLY, DIRECTLY AND EXCLUSIVELY for educational purposes • Exemption covers income, property, donor’s tax, and customs duties (distinguish from previous which pertains only to property tax) • Revenue must both be a) derived from an activity in pursuance of educational purpose; and b) proceeds must be used for the same purpose (ex. hospital adjunct to medical school tax exempt) (ex. Interest income not exempt). • Income exempt provided it is used for maintenance or improvement of institution. • Distinguish from tax treatment of (a) proprietary educational institutions (Preferential Tax); and (b) government educational institutions (exempt, ex. UP) 10) Delegated authority of President to impose tariff rates, import and export quotas, tonnage and wharfage dues • delegated by Congress • through a law • subject to Congressional limits and restrictions • within the framework of national development program 11) Law granting tax exemption (includes amnesties, condonations and refunds) shall be passed with concurrence of Congress majority of all members voting separately Relative majority (majority of quorum) is sufficient to withdraw exemption. 12) No use of public money or property for religious purposes except if priest is assigned to armed forces, penal institutions, government orphanage or leprosarium 13) Special purpose - special fund for said purpose, balance goes to general funds 14) Veto power of the President - revenue/tariff bill (Art. VI Sec 27, second par) 15) Power of review, revise, reverse, modify or affirm on appeal or certiorari of the SC – Rules of Court
(Art VIII, Sec 5, par 2) 16) Power of Local Government to create their own sources and levy taxes, fees, charges (Art X, Sec 6) 17) Just share of local government in national revenue which shall be automatically released. 18) Tax exemption of all revenues and assets of (a) proprietary or cooperative educational institutions (b) subject to limitations provided by law (Art XIV, Sec 4(3)) 19) Tax exemption of grants, endowments, donations or contributions USED ACTUALLY, DIRECTLY and EXCLUSIVELY for educational purposes B. Indirect Freedom of religion • Activities simply and purely for propagation of faith are exempt (e.g. sale of bibles and religious articles by non-stock, non-profit organization at minimal profit). • Tax is unconstitutional if it operates as a prior restraint on exercise of religion • Income even of religious organizations from any activity conducted for profit or from any of their property, real or personal, regardless of disposition of such income, is taxable Freedom of press/expression • Tax that operates as a prior restraint invalid. • If fee is only for purpose of defraying cost of registration and not for exercise of privilege, no violation. Mandatory Character of Constitutional Provision The established rule is that constitutional provisions are to be considered as mandatory unless by express provision or by necessary implication. A directory provision is generally intended merely for expediency or convenience such that to have it enforced strictly may cause more harm than by disregarding it. In case of statutory enactments, those dealing on the aspects of levy and compliance are generally treated as mandatory and those that are intended merely for administrative feasibility as directory. Aspects of Taxation (Phases, Processes, Stages/Steps in Taxation) • Levy – act of imposition by the legislature such as by its enactment of the law. include not only the mandate on when and how the tax is imposed but also, whenever it may be appropriate, the grant of tax exemptions, tax amnesties or tax condonations.
•
Assessment and Collection – act of administration and implementation of the tax law by the executive through its administrative agencies. means notice and demand for payment of a tax liability
•
Payment – act of compliance by the taxpayer including such options, schemes or remedies as may be legally open or available to him.
(a) imposed upon performance of an act, the enjoyment of a privilege or the engaging in an occupation, profession or business Ex. Income tax, VAT, estate tax, donor’s tax B. As to who bears the burden 1) Direct – the tax is imposed on the person who also bears the burden thereof Ex. Income tax, community tax, estate tax, donor’s tax 2) Indirect – imposed on the taxpayer who shifts the burden of the tax to another - levied upon transactions or activities before the articles subject matter thereof reach the consumers to whom the burden of the tax may ultimately be charged or shifted Ex. VAT, specific tax, percentage tax, customs duties C. As to determination of amount 1) Specific – tax imposed and based on a physical unit of measurement, as by head, number, weight, length or volume Ex. Tax on distilled spirits, fermented liquors, cigars 2) Ad Valorem - tax of a fixed proportion of the value of property with respect to which the tax is assessed; requires intervention of assessor. Ex. Real estate tax, excise tax on cars, nonessential Goods D. As to purpose 1) General, fiscal or revenue - imposed for the general purpose of supporting the government Ex. Income tax, percentage tax 2) Special or regulatory - imposed for a special purpose, to achieve some social or economic objectives Ex. Protective tariffs or customs duties on imported goods intended to protect local industries E. As to authority imposing the tax 1) National - imposed by the national government Ex. National internal revenue taxes, custom duties 2) Municipal or local - imposed by the municipal corporations or local governments Ex. Real estate tax, occupation tax F. As to graduation of rate (Three systems of taxation) 1) Proportional - based on a fixed percentage of the amount of the property, income or other basis to be taxed Ex. Real estate tax, VAT, percentage tax 2) Progressive or graduated - tax rate increases as the tax base or bracket increases Ex. Income tax, estate tax, donor’s tax 3) Regressive - tax rate decreases as the tax base increases 4) Degressive - increase of rate is not proportionate to the increase of tax base 5) Mixed - partly progressive and partly regressive • SITUS OF TAXATION - the place of taxation, the country that has the power to levy and collect the tax. Distinction from Certain Kinds of Exactions
Classification of Taxes A. As to subject matter of object 1) personal, poll, capitation tax (a) fixed amount (b) individuals residing within specified territory (c) without regard to their property, occupation or business Ex. Community Tax (Cedula) 2) property tax (a) imposed on property, real or personal (b) in proportion to its value or other reasonable method of apportionment Ex. Real estate tax 3) excise, privilege tax
TAX DISTINGUISHED FROM POLICE POWER TAX Purpose Amount exaction
Raise revenue of
Superiority of contracts
No limit Contracts may be impaired unless (a) government is party to contract granting exemption; or (b) involves
POLICE POWER (in the form of a FEE) Exercise to promote public welfare through regulation Limited to the cost of regulation, issuance of license, or surveillance Contracts may be impaired
Transfer Property rights
franchise Taxes paid form part of the public funds
of
EXCEPTIONS: Allows merely the restraint on the exercise of property rights
TAX DISTINGUISHED FROM EMINENT DOMAIN TAX Raise revenue
Purpose Compensation
Persons affected
Payment of taxes accrue to the general benefit of the citizens of the taxing State Applies to all persons, property and excises that may be subject thereto
EMINENT DOMAIN The taking of property for public use Just compensation is given the owner of the expropriated property Only particular property is comprehended
1) Both claims already became overdue and demandable as well as fully liquidated there must have already been an act of appropriation by the government (legislative) of funds for payment of the debt. 2) Tax overpayment (BIR’s obligation to refund or set-off arises from time tax was paid) 3) If the case involves local government taxes TAX DISTINGUISHED FROM SPECIAL ASSESSMENT Imposed on Why imposed Purpose When imposed
Regular exaction
Basis
Necessity
TAX DISTINGUISHED FROM LICENSE FEE Source Purpose Object Amount
TAX Exercise of Taxing power Raise revenue Persons, property and privilege no limit
LICENSE FEE Emanate from the police power of the State Regulation Right to exercise a privilege
TAX persons, properties, etc. regardless of public improvement Support of government
SPECIAL ASSIGNMENT Only on land Public improvement that benefits the land Contribution to cost of public improvement Exceptional as to time and locality Benefits obtained
TAX DISTINGUISHED FROM TOLL Kind demand Purpose
of
Amount
only necessary to carry out regulation
TAX Demand of sovereignty support of government no limit – depends on need of the government
TOLL Demand of ownership Collection for the use of property Fair return of the cost of the property or improvement
TAX DISTINGUISHED FROM CUSTOMS DUTY • Distinction lies in the primary purpose: • License fee if primary purpose is to regulate and the excess of the amount collected from the cost to carry out the regulation is minimal and incidental. • Tax if primary purpose, or at least one of the real and substantial purposes is to raise revenue. • If amount is too high for regulation, it would be a tax; unless imposed on non-useful occupations or businesses. • Purpose of distinction: limitations and exemptions apply only to one and not to the other (ex. Exemption from taxation does not include exemption from fee)
Coverage Object
TAX More comprehensive than customs duty Persons, property and etc.
CUSTOMS DUTY Kind of tax Goods imported or exported
TAX DISTINGUISHED FROM DEBT Source
TAX Law; legal obligation Personal Generally not subject to compensation/setof f Imprisonment is sanction for nonpayment
DEBT Based on contract Assignable May be the subject of compensation/setoff No imprisonment for non-payment
GENERAL RULE: Taxes cannot be the subject of compensation or set-off * A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of tax cannot await the results of a lawsuit against the government. Reasons: • lifeblood theory • taxes are not contractual obligation (absence of consent of taxpayer) • taxpayer and government are not mutual debtors and creditors of each other
INTERPRETATION AND CONSTRUCTION OF TAX STATUTES Where the doubt exists in determining the legislative intent, the doubt must be resolved liberally in favor of taxpayers and strictly against the taxing authority. The government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. The tax burdens are not to be imposed nor presumed to be imposed beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. The exemptions (or equivalent provisions such as tax amnesties and tax condonations) are not presumed and when granted, are strictly construed against the grantee. Classification of Tax Exemptions 1. Express by exemption provisions in the Constitution, statutes, treaties, franchises or similar legislative acts Examples of statutory exemptions are: (a) Sec. 30, National Internal Revenue Code (b) Sec. 105, Tariff and Customs Code (c) Special laws 2.
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Implied or by Omission There is no tax by silence but, where the law levies a tax, so also must the tax exemption be explicit in the law. There is no tax exemption solely on the ground of equity, but equity can be used as a basis for a statutory
exemption; thus, at times the law authorizes the condonation of taxes on equitable considerations. 3.
Contractual These are those agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws. May not be revoked without impairing the obligations of contracts
Tax exemptions are construed liberally in favor of the grantee in the following cases: When the law so provides for such liberal construction Exemptions from certain taxes granted under special circumstances to special classes of persons Exemptions in favor of the government, its political subdivisions or instrumentalities Exemptions to traditional exemptees, such as those in favor of religious and charitable institutions Tax statutes offering rewards are liberally construed in favor of awardees. NATURE OF TAX AMNESTY 1) general or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law 2) partakes of an absolute forgiveness or waiver of the Government of its right to collect 3) to give tax evaders, who wish to relent & are willing to reform a chance to do so RULES ON TAX AMNESTY 1) Tax amnesty (a) like tax exemption, never favored nor presumed (b) construed strictly against the taxpayer (must show complete compliance with the law) 2) Government not estopped from questioning the tax liability even if amnesty tax payments were already received Reason: Erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute. The government is never estopped by mistakes or errors of its agents. Basis: Lifeblood Theory 3) Defense of Tax amnesty, like insanity, is a personal defense. Reason: Relates to the circumstances of a particular accused and not the character of the acts charged in the information CERTAIN DOCTRINES IN TAXATION PROSPECTIVITY OF TAX LAWS Taxes may be imposed retroactively by law but, unless so expressed by such law, these taxes must only be imposed prospectively. Tax laws are neither political nor penal in nature and they are deemed laws of the occupied territory rather than of the occupying enemy, hence, the “ex post facto” rule, except for the penalty imposed (not the interest), would be inapplicable. A harsh retroactivity of the law, however, may make it inequitable and violative of the Constitution; similarly, due process is violated if the tax is oppressive. IMPRESCRIPTIBILITY OF TAXES For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. The law on prescription; being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exception to the law on prescription should perforce be strictly construed. DOCTRINE OF EQUITABLE RECOUPMENT 1) refund of a tax illegally or erroneously collected or overpaid by a taxpayer 2) such tax refund is barred by prescription 3) tax presently being assessed against a taxpayer
4)
may be recouped or set-off against the tax barred by prescription not allowed in Philippines, reason - LIFE BLOOD CONCEPT OF DOUBLE TAXATION Kinds of Double Taxation A. DIRECT DUPLICATE • taxing same person, property or right twice • for the same purpose • by the same taxing authority • within the same jurisdiction or taxing district • within the same taxable period • and they must be of the same kind or character of tax B. INDIRECT DUPLICATE • Exists if any of the elements for Direct taxation is not present • No constitutional prohibition on double taxation. However, where there is direct duplicate taxation then there may be violation of the constitutional precepts of equal protection and uniformity in taxation. Measures to avoid double taxation: (a) Treaty provisions against double taxation (b) Reciprocity provisions (c) Tax credit provisions TAX TREATY AS A MODE OF ELIMINATING DOUBLE TAXATION: 1) EXEMPTION METHOD – the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may taken into account in determining the rate of tax applicable to the tax payer’s remaining income or capital (ex. Tax Sparing Credit scheme) 2) CREDIT METHOD – the tax paid in the state of source is credited against the tax levied in the state of residence POWER TO TAX INVOLVES THE POWER TO DESTROY The doctrine seeks to describe the consequential nature of taxation and its resulting implications to wit: (a) The power to tax must be exercised with caution to minimize injury to the proprietary rights of a taxpayer (b) If the tax is lawful and not violative of any of the inherent and constitutional limitations, the fact alone that it may destroy an activity or object of taxation will not entirely permit the courts to afford any relief (c) A subject or object that may not be destroyed by the taxing authority may not not likewise be taxed Thus, a tax may not be imposed on the exercise of a fundamental right since to otherwise permit it would amount to destroying that fundamental right. ESCAPE FROM TAXATION Tax Avoidance (Tax Minimization) – tax saving device that is legally permissible Tax Evasion (Tax Dodging) – connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes; must be willful and intentional. SET-OFF OF TAXES Taxes are not subject to set-off or legal compensation. Reasons: 1) Taxes are of a distinct kind, essence and nature and these impositions cannot be so classed in merely the same category as ordinary obligations 2) The applicable laws and principles governing each are peculiar, not necessarily common to each 3) Public policy is better subserved if the integrity and independence of taxes be maintained TAXPAYER SUIT It is only when an act complained of, which may include a legislative enactment, directly involves the illegal disbursement of public funds derived from taxation that the ‘taxpayer’s suit” may be allowed. COMPROMISES These are allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering into it is duly authorized to do so.
No provisions exist under the Local Government Code, while the tax (not criminal) liability is not prohibited from being compromised; there is no specific authority, however, given to any public official to execute the compromise so as to render it effective.
