TABLE OF CONTENTS Page
EIC{:I
(lhapter I. GENERAL PRINCIPLES
m Assoclation of Lnw Studenh of the Phlllppines Itfuulr awardr this
CERTIFICATE OF APPRECIATION
1 ,'flilxation Defined 1 .'l'axes Defined 3 Irnportance of Taxes ..'.'....".....'. 3 '['axes, Personal to Taxpayer 4 Nature of the Taxing Power 5 of Taxation and Objectives lurposes /'l'heory 7 and Basis of Taxation 8 ............'.'...... /lcope of the Legislative Taxing Power 9 ls the Power to Tax the Power to Destroy? Constitutional Restraints Re: "Taxation is the 9 Power to Destroy" 11 Power of Judicial Review in Taxation .:.............'....
Aspects of
llasic Principles of a Sound Tax System Taxation Distinguished from Police Power and Eminent Domain Taxes Distinguished from Other Impositions Taxes Classified Taxpayer's Suit............
tu{rs, 9{ntwilnd A, 6 an d f affiiqy For thoir kind underctrnding and generooity in allowing the Association of Law Students of tlto Ptilippino to grart to thcir patriarch thc posthumous BENJAMIN B. ABAN t-AW PROFESSOR
Cases Exercises
OFTHEYEARAWARD; For such gesturo, thoy havc allowed thc Aesociation, in its very modcst wa5 to show apprcciation for thc contribution of Profoasor BENJAMIN B. ABAN in a vory domanding disciplinc which he faithfully sorvod whilc rtill living, ths Award givon during the loth National Confercnce of Law Students throughout thc couutry wherc Oe studoflts discussed the thems "The Rolc of law Students in tho Next
Millotnium."
Taxation
C)
- kl,''"t.'-('tmnuofw meNcrscA
A. caBIE
National Ctairman
13 14
23 28 29 49
hapter II. LIMITATIONS ON THE TAXING POWER Inherent Limitations on the Taxing Power
Given thie 7th day of Novembcr 1999, at Oc Traders Hotel, Roxag Boulovard, Metro Mmila.
L2 12
B. Non-Delegability of the Taxing Power C. Tenitoriality or the Situs of Taxation D. Exemption of the Government from Taxes E. International Comity Constitutional Limitations on the Taxing Power Constitutional Limitations Explained ..'...'.......... A. Due Process of Law B. Equal Protection of the Law ............ C. Freedom of Speech and of the Press D. Non-Infringement of Religious Freedom E. Non-Impairment of Contracts vtl
53 53 54 57 64 65 66
o/ 67 70 73 75 77
rI TABLE OF CONTENTS
LAW OF'BASIC TAXATION IN THIT P}IILIPPINES
Page
Poge
Non-Imprisonment for Debt or Non-Payment 80 of PoIl Tax ........'... -80 BiIIs Tariff and ".'"""' G. Origin of Appropriation, Revenue H. Uniformity, Equitability and Progressivity of Taxation ' 81
F.
I.DelegationofLegislativeAuthoritytoFixTariffRates,
J. K. L.
83
Import and Export Quotas, etc' ".'""""' Tax Exemption of Properties Actually, Directly and Exclusively Used for Religious, Charitable and
84
Voting Requirements in Connection with the Legislative Grant of Tax Exemption Non'Impairment of the Supreme Court's Jurisdiction
87 87
in Tax Cases M. Tax Exemption of Revenues and Assets, including Grants, Endowments, Donations or Contributions to Educational Institutions """"""' Provisions Related to Taxation Constitutional Other
88 92 94 110
Cases
Exercises
ChapteTIII.DoUBLETAXATIoNANDTAxEXEMPTIoNS
""' Double Taxation Defined Taxation Double """"""""" Against No Prohibition "" Kinds of Double Taxation Taxation """"".'""""""""""' Means Employed to Avoid Double
113 113 113 115 118 118 118 120
""""" Tax Exemptions.....'...'. ""' Tax ExemPtions Kinds of """""" Exemptions Tax """""' Principles Governing "".'""""' Illustrative Situations on Tax Exemptions Tax-Exempt Persons Required to Keep Books of Accounts """"' 124 """""""""' L24 Tax Avoidance; Tax Evasion; Tax Fraud ................... 128
cases Exercises
Chapter IV.
""""""
141
TAX LAWS AND REGULATIONS
Nature of Tax Laws .--'.'.... Interpretation of Tax Laws Sources of Tax Laws ......'...
""
143
"""""""""""
144
"'
VIII
145
........ 145 Mandatory and Directory Provisions ................. ....... L47 Ilublication Requirement .................. ................... 148 Are Tax Laws Special Laws? 'l'ax Regulations .......... .......... 148 1'ax
Rulings..................
.......... 149
I'ower of the Commissioner to Interpret Tax Laws ..................... 150 and to Decide Tax Cases
Non-Retroactivity of Rulings Legislative Adoption of Tax Rulings Doctrine of Implications.............. 'lax Treaties and International Agreements
Cases Exercises
................... ...... ............. .......,.... .........,.,....... ............
150
L52 L52 153 154 168
Chapter V. TAX ADMINISTRATION AND ENFORCEMENT ..... Agencies Involved in Tax Administration ............ .................... Bureau of Internal Revenue Agents and Deputies for Collection of National Internal .................. Revenue Taxes Powers and Duties of the Bureau of Internal Revenue ............... Power and Duty of the Commissioner to Interpret ........... Laws and to Decide Tax Cases Appellate Jurisdiction of the Court of Tax Appeals ..................... ....... RuIe of "No Estoppel Against the Government"
Is There Estoppel Against the Taxpayer? .............. ................ Nature and Kinds of Assessments.............. ......... Principles Governing Tax Assessrnents............ Investigative Powers of the Commissioner; Factual Basis of Assessments................. ............... .......... Means Employed in the Assessment of Taxes A. Examination of Returns; Confidentiality Rule ................... B. Assessments Based on the Best Evidence Obtainable ......' C. Inventory-Taking, Surveillance and Presumptive ............ Gross Sales and Receipts.................. ..... D. Termination of Taxable Period ..... E. Fixing of Real Property Values ........... F. Inquiry into Bank Deposits Tax Agents.................... Registration of Accreditation and G.
170 170
172 172
L72 173
173
... L75
ix
175 176 178 779. 179 181
182 183 183 183 184
l,AW Ot' IJASI()'l'AXA'flON
lN'l'lI
I'l
,I'AI}LU OIT UONTIINTS
l)llll,ll'lrlNlls
H. Imposition of Additional Procedural or Documentary Requirements.'..".'.... Enforcement of Forfeitures and Penalties... Supervisory and Police Powers of the BIR '...'......' Authority of the Commissioner to Delegate Power Powers and Duties of the Regional Director Duties of Revenue District Officers and Other Internal Revenue Officers
Puge
Page
188 188
()olk-rction Thru Filing of the BIR's Answer in the CTA.".........'. 248 l,inbility of Stockholders for Unpaid Taxes of ..... 248 Dissolved or Defunct Corporation
......'.......
t92 1.92
193
794
198
Brief Survey of Compliance Requirements, Statutory Offenses and Penalties ........."..... A. Compliance Requirements B. Statutory Offenses and Penalties ... ".....'..... L Additions to the Tax ............:.............i,'." II. Statutory Offenses and Penalties ..............'. a. General Considerations ..............
198 198 207 207 21_3
2t3
Survey of Some Specific Offenses and Penalties '.. 214 222
.............
223
Cases
qqo
Exercises
Chapter VI. TAX REMEDIES REMEDIES OF THE GOVERNMENT 23t ...'.....:......-........ Importance of Tax Remedies 231 Tax Collection" to Restrain Rule on "No Injunction Collectibility of Tax as a Basis for Collection Enforcement ......' 232 233 Remedies of the Government '.........'...... 233 Tax Liens Compromises................
Collection by Distraint and
235
Levy
Civil Action Collection in Cases Where the Assessment is Final
(1lscs l,lxorcises
.......".'.....- 250 ........-'.....'...' 250 ...'..'...'....... 255 .,....'..-. 265
195
Sources of Revenue
b. c. Forfeitures
(lollcction Thru Application of a Disputed Tax Against a Refundable Tax (lrirninal Action
.........:.' 237 244
and Unappealable Collection in Ca'bes Where the BIR's Decision is '."""""" Final, Executory and Demandable .........' Defenses Precluded by Final and Executory Assessments ......." .".""" Prescription of Government's Right to Assess
(ihlpter VII. TAX REMEDIES - BEMEDIES OF THE GOVEBNMENT - STATUTE OF LIMITATIONS l)rcscription of Government's Right to Assess Taxes ........'....-.-.- 267 Whon is a Tax Assessment Deemed Made? ".'..."..-... 268 ll,Lrlease of Assessment Notice or Demand Before the --.-.... 269 Lapse of the Prescriptive Period I rnportant Considerations Re Prescription of (lovernment's Right to Assess Taxes ....................270 A. Date of Filing Tax Returns - A Material Factor in Resolving Questions on Prescription..'.."'.. ". ............. 27 O ...........-..'- 277 B. Effect of Filing an Amended Return ......'.'.......272 Wrong Return'.'...'. C. Effect of Filing a D. Period Applicable When the Law Does Not Require ........... 272 the Filing of Any Return E. Applicable Prescriptive Period if Taxpayer Fails ....'...........:..-. 273 to File a Beturn.... F. Prescriptive Period of Assessment When There ..................274 is Fraud llrescription of Government's Right to Collect Taxes .'.....'......'... 281 ...................287 I4quitable Recoupment and Preecription ...............'..'.. 287 Interruption of the Prescriptive Period .'.............'-'... 293 RuIe of Prescription in Criminal Cases When Defense of Prescription May be Raised Even on Appeal .. 294 Prescriptive Period in Criminal Cases ' When Does It ......-.- 294 Start to Run? ..........
245
't
246
Exercises
........... 311
247
248
xl
.1 l,nw ()l' llAslc
TAXA'I'ION
'IAIILE ()l'(I0NTENTS
lN'l't{ll l'tlll'lt')PlNLS
Page Page
Chapter
VIII.
('hlptcr X. LOCAL TAXATION
TAXPAYER'S REMEDIES
...'.'....'....' Nrrture and Source of Local Taxing Power Law .'....................' Existing under Power Taxing lrant of Local I)ower to Prescribe Penalties for Tax Violations "' and Limitations Thereon....-.'.........' .............'....".' l'ower to Grant Local Tax Exemptions ..........'.."."."' l'ower to Adjust Local Tax Rates....."... ll,osidual Taxing Powers of Local Governments........,.'.......'." "" " """""' l'rcemption or Exclusionary Rule Power Taxing of Local lrundamental Principles """'
"""" 313 Administrative Protests """"""""" Effect of Taxpayer's Failure to File an Administrative of Protest o" to App"ul the BIR's Decision to the Court "" 320 Tax Appeals .,'........'..... Refund or Recovery of Erroneously or IIlegaIIy """""""' 321 Collected Taxes 325 Distinction Between Tax Refund and Tax Credit""""""""""""'
(
IsPaymentUnderProtestNecessaryinClaimsforRefund?....,326 Principle of Equitable Recoupment in Relation to
lrr-rndamental Principles Briefly Explained ()ommon Limitations on Local Taxing Power ()ommon Lirrritations Explained l,cvying of Local Taxes - Local Ordinances llrief Survey of Taxes and Other Impositions that Local Governments May Levy - Enumerated Taxes
"' Tax Refunds....."...."""' Refund """"""' 336 Legal Capacity of Withholding Agents to Claim """"""""""' 337 Interest on Tax Refunds""' 336
Cases Exercises
""""""""" """""'
338
352
Situs of Local Taxation ........'...'. ()ommon Revenue-Raising Powers ......'.......'.. Oommunity Tax............. (lollection of Local Taxes tlemedies of the Taxpayer in Local Taxation
Chapter IX. COURT OF TAX APPEALS
'""""" 354 Origin of the Court of Tax Appea1s""""""""" """"" 354 Salient Features of the Court of Tax Appeais Cases Organization, Quorum; Disposition of "Brought """"""""""" 355 Before the Tax Court""""" """"' 356 Powers of the Court of Tax Appeals """"""""" """""""""' 356 Jurisd.iction of the Court of Tax Appeals """""" 359 "Compromise Penalties" and the CTA """""' """""""""' 359 Whose Decisions Are Appealable? """""' Finality of """' 360 The Question What Decisions Are Appealable "' 362 Appeal"""' Tax Collection Not Suspended During """"""""' 363 Thirty-Dav Prescriptive Period of Appeal AdministrrrtiveActionsTantamounttoAppealableDecisions'..366 """"' 369 Appeal from Decisions of the CTA 374 """""" Interlocut,ory Orders """""' 375 Findings of Iract of the CTA, Not Reviewable """"" 379 Ancillary Jurisdiction of the CTA """""" 380 Other Matters Bearing upon the CTA """""' """""""" 380 Damages in C'l'A Proceedings Cases Exercises
""""""""" """""
381 388
(lases I,)xercises
(
391 393 394 394 396 396 397 399
.".""."""
400
"""""' """""" """""""'
401 402 406
"""""""'
407
........"."' 412
"""""" 416 """' 4L7 .... 418
""""""
422
.................. 424
"""""
434
llrapter XI. REAL PROPERTY TAXATION
"" 436 A. Substantive Aspect of Real Property Taxation """"""""' 436 Real Property Tax Defined Nature and Scope of the Local Taxing Power in ReaI Property Taxation '.."""""" 437 """""" 438 Extent of Local Taxing Power Power to Prescribe Penalties for Tax Violations '."""""""""' 438 Fundamental Principles Governing ReaI Propertv Taxation """""""' 439' Tax 441 from Exempt Properties Exemptions Tax of Question """"" 442 Proof of Tax Exemption......'.""' Brief Survey of Cases Involving Real Property """"""""" 443 Tax Exemptions......'.."
xrlt
I,AW
OTI
I]ASIC TAXA'I'ION
lN'I'IIIi
't'A
PTIII'IPPINT)S
tll,u ol'
(l(
)
N'l'liN'l's Page
Page
""""""""""" 444 Real Properties Subject to Tax""""' Taxability of Some Court Rulings on the Question "" 445 of Real ProPertY."' Taxation """""""" 447 "I]se" and "Ownership" In Real Property is Rule Applied Where the Person Assessed 448 Neither Owner Nor User - Concordiu Lim Case"""""""' 450 B. Administration of the Real Property Tax """"""""""""""""' Administration the Basic Considerations Relating to ""' 450 of the ReaI Estate Tax """"""' 450 """"' I. Administrative Requirements """""""" II. Listing of Property for Assessment Purposes """""' 452 Assessment RoIl """""" "" 452 tII. ReaI Property Tax Assessment in General """""" 455 IV. Mechanics of Assessment """""""""" 458 C. Remedies in ReaI Property Taxation ""' 458 I. Remedies of Local Governments """".'".'" """""" 462 II. Remedies of the Taxpayer 462 (a) Remedy Against the Assessment """"""""""""""""" Appeals """"""" 464 ( i) The Local Board of Assessment Appeals """"" 464 (ii) The Central Board of Assessment of pffect Payment of Appeal on the (iii) """"""""""" 464 RealProperty Tax """"' (b) Administrative Protest (c) Tax Refund or Credit
Special Levies on Real Property """""""" Condonation of ReaI Property Taxes
Cases Exercises Chapter
XII. TARIFF AND CUSTOMS
""""" 465 .'"""""' 466 """"""""' 466 """ 468 """"""".'" 468 """""" 489
LAWS
A. Substantive Aspect of Tariff and Customs Laws """""""""" Meaning and Scope of Tariff and Customs Laws """""""""" """"""""" Nature of Cusioms Duties and Tariff" Purposes Duty """.'""""""""' Customs for Goods of Concept """"""""" Kinds of Goods Liens """"" Tax and """"' Importation, Liability Jurisdiction and Importations Vis-i-vis Powers of the Bureau of Customs Kinds of Customs Duties
"""' ""' """""""""'
492 492 493 493
494 506 507 507
........... Vrrlrration of Goods ...... Ilonro (lonsumption Va1ue (HCV) .......... l,'lcxible Tariff ......... It. Acl ministrative Aspect of Tariff and Customs Laws...............
508 510 511 513
'l'rrriff Commission ........... 513 .......... 515 of lltrreau Customs ................."".. 515 lrrrnctions of the Bureau of Customs Ot,hcr Powers and Duties of the Bureau of Customs ........"..... 515 (' l'rricr.rdural Aspect of Tariff and Customs Laws ................"..'.. 515 Nirt,ure of Customs Protesb; Seizure and Forfeiture Cases.... 515 porfeiture Cases .......... 515.................... 516 I)rocedure in Customs Protest Cases ......... 518 Atrl,omatic Review in Customs Proceedings (ltrstoms Seizure and Forfeiture Cases - Basic Concepts......' 518 Srrrne Court Rulings on Searches and Seizures ..................-.... 521 (iustoms Forfeiture Actions ................ 523 ...........536 l'roperties Subject to Forfeiture................. (lornmon Carriers; Forfeiture ............. 538 oLhcr Considerations Affecting Seizure and .......... 538 lt'orfeiture Cases Sorne Illustrative Court Rulings on Customs Forfeiture Cases '...'....'..' 539 ( )llrcr Considerations Relating to Tariff and Customs Cases .... 541
lls(rs f,jx.rr:ises
(
................... 543
............577
Chapter I GENERAL PRINCIPLES 'I'AXATION DEFINED. Taxation is the power by which the its law-making body, r35:'s revenue to defray llrl rrccessary expenses of government. Ii is merely a way of :rplrort,ioning the costs of government among those who in some ,r{,!(.r'ci[an, through
lll1,]ll.ittrearepriv@efitsandmustbearitsburdens
1;,1 tltrt"
Jur.
34).
Irr one decided case, the Supreme Court of the Philippines it as a "syml:iotic" relationship whereby in exchange for I lrr. lrrgtoction thaf lhe citizens gel from the Government, laxes are al., L-28896, ;,,r rrl (( iLtn'rrnissioner of ll,ternal Reuenue u. Algue, Inc., et
rl,'r;t:r'illcd
17, 1988). 'l'hc rationale of taxation is graphically described by the Supreme ('.lu't, in these words: "It is said that taxes are what we pay for , rv rlized society. without taxes, the government would be paralyzed 1,,r. lltck of the motive power to activate and operate it. Hence, despite tlrc rrirtural reluctance to surrender part of one's hard-earned income Io l [rr taxing authorities, every person who is able must contribute lr rs share in the running of the government. The government for its 1,rr|t, is expected to respond in the form of tangible and intangible lrr,rrofits intended to improve the Iives of the people and enhance llr('ir moral and material values. The symbiotic relationship is the I rrl,ionale of taxation and should dispel the erroneous notion that it r:r irn arbitrary method of exaction by those in the seat of power" I,','1,.
(:;tr.pra).
Moreover, fair-dealing on both sides of this symbiotic relationship
rs ()1'paramount importance in order to maintain its harmonious r.lritracter. As stated by the supreme court, "taxpayers owe honesty l.o government just as government owes fairness to taxpayers" 1(lommissioner of Interna.l Reuenue u. Tokyo Shipping Co., Ltd., etc.,
al., G.R. No. 68252, May 26, 1995). "If the State expects its Laxpayers to observe fairness and honesty in paying their taxes, so rnust it apply the same standards against itself x x x' No one' not .ven the Siui", should enrich itselfat the expense ofanother' x x x" (BPI-Family Sauings Baruk, Inc. u. Court of Appeals, et al., G.Rr't,
No. 122480,
Apr. 12, 2000)'
Ln
w olr ltnsl(:'l'n xA'l'loN tN,t'ilt, I,ilU,il't,lNI,tFi
'rAxES DEFINED. 'faxr:s arc trrc e.rbrcect pr.port,io,.r contributions from persons and property leviecl by the law-making body of the state by virtue of its sovereignty for the support of government and for public needs (l Cooley 62_65). From this definition, the foilowing may be said to be the attributes or characteristics of taxes: (a) A tax is a forced charge, imposition or contribution and as such it operates in inuitum, which means that it is in no way dependent on the will or contractual assent, express or implied, of the person taxed. They are not contracts, either expressed or implied, but positive acts of government (Rochester u. Bloss, lrs Ny 42, zr NE 794, 61 LRA [NS] Ann T, Cas. 1S). (b) It is a pecuniary burden payable in money, such that a tax is not necessariiy confined to those payable in money (r cooley 6J), as in the case, for instance, of backpay certificates which under R.A. 304 could be used as payment of taxes (De Borja u. Geila,
L-18330, July 31, 196J). In one case, the supreme court held that backpay certificates under R.A' 304 may be used to pay real estate taxes (Tirona u. city Treasurer of Manila, et al., L-24607, Jan. 2g, 196S). (c) It is levied by the legislative body of the state because the taxing power is peculiarly and exclusively legislative in character (51 Am. Jur. 71). Taxes are obligations created by la* (Vera, etc., et al. u. Fernarudez, etc., et al., L-SlJ64, Mar. 50, lif il. (d) It is assessed in accordance with some reasonable rule of
apportionment, which means that conformably with the constitutional mandate on progressivity of a taxing system
(sec. 28[1J, Art. vI, 1g8T constitution), taxes must be based on ability to pay. Do regressiue taxes go against the constitutional mond,ate in, Sec. 28(1), Art. VI of the Constitution? In the case of Philippi*e Airli*es, Inc. u. secretary of Fi*ance, et al. (G.R. No. 115852, Oct. 30, 199b [Resolution]), and companion cases' the supreme court, in upholding the validity of the Expanded Value-Added Tax Law (R.A. 7716), said: "The constitution does not realry prohibit the imposition of indirect taxes which, Iike the VAT, are regresslve. What it simply provides is that congress shaUeuotie a progressive system of taxation.'x x x Resort to i,direct taxes should be minimized but not ouoided entirely because it is difficult, if
(
;
I,)NliltAl, I'Iil NCI l,l,l,:s
rr.l nulrossible, to avoid them by imposing such taxes ,,,,,,r'rling t<-r t.he taxpayers'ability to pay. x x x" 1,.) ll. is irnposed by the State on persons, property or services ,. rtlrrrr rl:r jrrrisdiction. (l) lfirrally, a tax is levied for a public purpose as taxation in rt,,,.ll rrrvolvcs a burden to provide revenue for public purposes of a r,,.r{'r'rl ttrtt,ure (51 Am. Jur. 39). ,,\ I rrx r:reates a civil liability on the part of a delinquent taxpayer, ,r lt lr,rutrlr t,he non-payment thereof (whether it be on account of the ri,{t,rr\,(.r's lailure or refusal to pay it) creates a criminal liability, ,. l,r, lr cotrld be the subject of criminal prosecution under existing 1,, r1 ,r lrr short, in taxation, it is one's civil liability to pay taxes that r, r.,. r r rrir' (,u crirninal liability, not the other way around as in criminal , J, ,,.,, wlrcre criminal liability gives rise to a civil liability (Republic t. I'trlrutuo, L-22356, July 21, 1967). I
M I'|ORTANCE OF
TAXES.
Taxes are important because they
,,r! tlrr,-lj,fehlood of the Government and so should be ca]culated ,.
,
r
1,,
necessary hindranc e (Co m mis sion er of Internal Reuenue et al., supra). The legislature, in adopting measures inrt)l('nlent our tax laws, wants to be assured that taxes are paid
r
Irrrrr
I
I-r n
ll1'ttt',
1ruc.,
,rr,l crrllccted without delay (Philippine Guaranty, Co-, Inc.
u.
I t,rnni:;sioner of Internal Reuenue, et al., L-22074, Sept. 6, 1965). ll, rrrli l,hr: lifeblood of the Government, their prompt and certain ,',,rrl:rlrility is an imperious need (Collector of Internal Reuenue u. t,,,,rrlr itlr, International Rubber Co., L-22265, Dec. 22, 1967, citing !tr,ll r,. Il-5.,79 L. Ed. 1421-27). Further, "(t)he primary purpose is r,, 1i.rrt.r'ate funds for the State to finance the needs of the citizenry ,rrrl lo ndvance the common weal. Due process of Iaw under the t ',,rr:;l rt,ution does not require judicial proceedings in tax cases. This ,rrrr';1 necessarily be so because it is upon taxation that the rl"\,(.r'nment chiefly relies to obtain the means to carry on its 't" r'rt,ions and it is of utmost importance that the modes adopted io , rrl.r'(:e the collection of taxes levied should be summary and rrrr,.rf'ered with as little as possible" (Philippine Bank of r',,rtrrnunications u. Commissioner of Internal Reuenu.e, et al., G.R. l'1,, I 19024, Jan. 28, 1999). 'I'AXES, PERSONAL TO TAXPAYER. Taxes are personal to llrr. l,uxpayer. A corporatiori's tax delinquency cannot, for instance, l,r'r'nlbrced against its stockholders because not only would this run '(,unLcr to the principle that taxes are personal, but it would also
(
t,Aw ot,' BASTC l'AxA',t'lON lN',l'll U t'ilil,lt,t,lNlts
not be in accord with the rule that a corporation is vested by law with a personality that is separate and distinct from those of the persons composing it, as well as from that of any other legal entity to which it may be related (Sunio, et al. u. Nationq.l Labor Relations Commission, et al., G..8. No. 57767, Jan. 31, 1984 cited in Torres, Law of Business Organizations, p. 126). Be that as it may, however, stockholders may be held liable for the unpaid taxes of a dissolved corporation if it appears that the corporate assets have passed into their hands (Tan Tiong Bio u. Commissioner of Internal Reuenue, L-15778, Apr. 23, 1962), or when stockholders have unpaid subscriptions to the capital of the corporation. Similarly, estate taxes accruing upon transmission of the decedent's estate to his heirs are not liabilities which can be enforced against his heirs, for estate taxes are supposed to be obligations that must be paid by the executor/administrator out of the net estate, before delivery to any beneficiary ofhis distributive share. However, if prior to the payment of the estate tax due on the transfer of decedent's estate, the properties of the deceased are distributed to any beneficiary, then such beneficiary shall be subsidiarily liable for the payment of such portion of the estate tax as his distributive share bears to the total value of the net estate (Sec. 9 1 ICJ, National Internal Reuenue Code of 199 7 /hereafter , 1997 NrRCI).
NATURE OF THE TA)ilNG POWER. The power to tax is an attribute of sovereignty. It is inherent in the State. As an incident of sovereignty, the power to tax has been described as "unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it" (Moctan Cebu International Airport Authority u. Marcos, etc., et al., G.R. No. 120082, Sept. 11, 1996).In one decided case, the Supreme Court called it an awesome power. However, no matter how awesome it may be, it must not be exercised arbitrarily (Commissioner of Internol Reuenue u. Algue, Inc., supra). Taxation is a power emanating from lneeessity; a necessary burden to preserve the State's sovereignty,Strt a means to give the citizenry an army to resist an aggression,ydavy to defend its shores from invasionr"aCorps of civil servants to'serve, public improvement designed for the enjoyment of the citizenry and those which come within the State's territory and facilities, and protection which a
ll,lN
l,llt^l, l'ltlNCll Pl,us
Guaranty Co" Inc' u' r.,,\, r rrrrt.ttl is sttplt,se tl t,o provide (Philippine | \,rrtnt:;:;irtttt't'ttl lttl,arnul Reuenue, et al', supra)' As st'ated'in onc u' CTA, et al'' L-30232' July 29' 1988)' ' ,1 'r' ( l,tt:tttt Sle.otttloring Corp. the relinquishment of I ,r c;rl rorr is a high p"eJogative of sovereignty thereof ,r lrrr'lr rs ttLrver pr""rrrrrut, and any reduction or diminution the and ,.,rt lr r.r,sperct t,o its mode or rate must be strictly construed any ,,,,',,. ,',,,r1 bc couched in clear terms' [!e general-rulejslhat statutesKhould be construed strictly ' Irrrrr lirr cxempfion from tax ,r I I rr r
r r
ril, t,htl_!g>rgaYer'
lnr:itlentally, the power to tax is not granted in the Constitution' d6 not t ',,rr;il rt.ulictnal provisions relating to the power of taxation rr1,r'r;rlt its grants of the power oitaxation to the Government,,"Wrt I rrr';l.ir(l rnerely .orrrtgrrgliA$gtions upon a power yhich would ,,1lr, r'wrst'be pr?[tically without limtt' and A:; trlready mentioned, the taxing power is- peculiarly the in undiminished , ,., lrr:rivcly Iegislati,re in character and remains and thereof'glear 1,,1.r:;l:rt,rtre in the absence of an express surrender
..1,lrt.it,initsterms(sl,q,*Jur.il-zavIrbe_@9t t,, ittlrorcnt and constitutional iimitationb'
I'I III I'OSES AND OBJECTIVES OF TAXATION (ti Reuenue - Basically, the purpose of taxation is to provide welfare , ,,,,i,,i,,.'fr fo with which the State promotes the general 71'73)' (51 Jur' Am' ,,,,1 1,r'ol,cct,ion of its cilizens in rltt,77..---Repulation. - Taxation also has a regulatory purpose as r1,,.(:rse of taxes tevied on excises or privileges like thoseimposed like night ,,rr l,lraggo and alcoholic products, or amusement places 1,,
l,s.
cockPit$ftc
"[bu""tr, ,l,,,xation-is not
rnlely a power that is exercised in order to raise also be r(,\'(.nue for the ,rppori of the Government' Taxes may in the ,,,'t,osed for a regulatory purpose as' for instance' wXiEET iqdg.ltry ,, b ilitatio' urrd. itubitiruiio.r-gi ",lhreatened Tte;Ffrlloi[ffi' ,,''i,.,'r; 8' 1992)' trrr' o. Commission o"=a-,"ait, et al', G'R' No' 92585' May (t'.\ Prom.otion. of General Welfare - In one decided case' the .
I
rrr
be used as an imPlement of of the peopie. rl,,: police power in order to promote the general welfare 'lhus, in the case of Lutz u' Araneta (98 Phil' 148)' the Supreme
;1,,r,.J*1,
('orrrt upheld the validity of the Sugar Adjustment Act' which the law was to ,rrrposed a tax on milled sugar since the purpose of
r[' l,AW Ol,' l]ASIO'lAxATloN IN',l'll l'l
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strengthen an industry that is so undeniably vital to the economy the sugar industrY. How the police power is enhanced through taxation is further illustrated in the existence of the oil Price stabilization Fund (oPSF), a device designed to protect the public from the adverse effects of fluctuations in the prices of imported crude oil' As ruled in the case qf Osmefi,a u. Orbos, etc., et ol' (G'R' No. 99886, Mar. 31, 1993), while the funds collected under the OPSF may be referred to as taxes, they are exacted in the exercise of the police power of the State. From such fund, amounts are drawn to reimburse oil companies when appropriate situations arise for increases in, as well as under-recovery of, the cost of crude oil importation. (d) Red.uction of social Inequality - This is made possible through the proglessive system of taxation where the objective is to prevent the undue concentration of wealth in the hands of a few individuals. Progressivity is keystoned on the principle that those who are able to pay should shoulder the bigger portion of the tax burden' Incidentally, the present rates ofincome, estate and gift taxes present a good example of progressivitY. (e) Encourage Economic Growth - Taxation does not only raise public r&enue, but in the realm of tax exemptions and tax reliefs, ior instance, the purpose is to grant incentives or exemptions in order to encourage investments and thereby promote the country's economic growth. It is worthwhile to note that since the power to tax is inherent in the state, the power to exempt from tax is inherent in the state also. This is not necessarily so in the domain of local taxation. Since in local taxation, the taxing power is only delegated, i.e., either under the constitution or by virtue of legislation or both, it follows that in order to grant tax exemptions, Iocal governments must justify its exercise under constitutional or statutory law or both, as the case may be. In the Locai Government code (sec. 192),local governments may grant tax exemptions. It is, however, significant to note that with respect to real property taxes, no such power exists, save in the case of condonation of taxes which can be granted only for certain justifiable reasons which are expressly stated in the law (see Sec. 276, Local Gouernment Code). (fl Protectionism - In some important sectors of the economy, in tlTe case of foreign importations, taxes sometimes provide as
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lrurl industries like protective tariffs and customs
'l'll l'l()ltY AND BASIS oF TAXATION. There are two reasons I lr. r'xcrcisr,' by the state of its taxing power is justified. one is
ir lr 1'
,,
the other is the grant of Brotection and benefits by its citizens. ' (rr) ly'r,r'.:ssity Theory - Taxes proceed upon the theory that the r''',lr'rrr:t'o['government is a qecessity; that it cannot continue ,: rr l,rr I I lre rneans to pay its exp?nse_-$ and that for those means, it l,r , rlr. right, to compel all citizens and property within its limits to ,, r,lr rlrrrlt,(5/ Am. Jur.42). \, , ,r'rli.g tpour supreme court, taxation is a power emanating lr 'r, .,'(','s*i!rf It is a necessary burden to preserve the. state's ,,,\. r,.'sirrtydnYa means to give the citizenry an army [o resist ,,r,l,rt,,r,,r,,ni a navy to defend its shores from invasion, a corps ofqvil ,,r r r irrl. l. serve, public improvements designed for the enjoyme\t ,,t tlr,'r'rlrzcnry and those which come within the state's territor\ 'rrr,l lrr.rlities, and protection which a government is supposed to. I',,,\ r(li. Ql 'hilippine Guaranty Co., Inc. u. Commissioner of Internal /i, ,,, ,rrriJ t'l ttL., supra). rl,t 'l'lrr llenefits-Protection Theory - According to this theory, r lr, I ll;r l. rlcrnands q]}d :eceives taxes from the subjects of taxation ,, r r lr r r. r ,,lii-.iJai"tio" ro trruilt mayTe enabled to carry its mand.ate irr I , r r'l l,'r'1, irnd perform the functions of governmentl/and the citizen 1',,1 , lr,,rrr his property the portion demanded in order that he may, l,: rrrr':rrrs t,hereof, be secured in the enjoyment of the benefits of ., r. ,r rr r;,,'tl society. However, the foundation of the obligation to pay r ,r 'i,' , rr,l, t,he privileges enjoyed or the protection given to a citizen ',, l,r tlr,.(lrv.rnment, although the payment of taxes gives a right to ni't,', lr,r.; lroth are enjoyed as well by those members of a state ,, lr,, rlrr rrot, pay taxes because they are not able to do so (51 Am. tttr l:: '1,'t). l\lrrlr,rrver, as pointed out in the Algue, Inc. case, supra, in r '., lrr,rit' lirr the protection that the state gives to its citizens, taxes rrr,r ,t lrr.r:orrespondingly paid to it. f, ll ,,lr,rrrlcl be noted that while taxes are intended for general 1,, 111.1,qr;, spccial benefits to taxpayers are not required. Thus, the I',,rrr I lrt'lrl that from the contribution received, the Government r, rrrl.r'ri r, special or commensurate benefit to any particular person ,,r i,r iltr'r'(..y. A tax is not imposed on the basis of a special or particular 1,, r,,.lrt rrt..ruing to each citizen in proportion to the tax paid. I
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t,AW ()t. I]ASIC TAXA'I'ION IN'I'II U I'IIILII'I'INI'S
According to the Supreme Court, a person cannot object to or resist the payment of taxes solely because no persc,nal benefit to him can be pointed out as arising from the tax (Lorenzo u. Posadas, etc., 64
Phil.353). In the case of Gomez u. Palomar, etc., et al. (L-23645, Oct. 29, 1988), the Supreme Court upheld the validity of the Anti-TB Stamp Law (R.A. 1635) which required the affixture of a semi'postal stamp on mail matter between Aug. 19 and Sept. 30 of each year. It was held that although no special benefit accrues to mail users by such stamp, it is not necessary, to constitute a public purpose, that special benefits accrue to a taxpayer; it is enough that he enjoys the benefits of living in an organized society
gtr scoPE oF THE LEGISLATM TAXING POWER.
Legislative taxing power or discretion extends to the following: (g) the person, property, or occupation to be taxed (51 Am. Jur. 172f. Excises or privileges, provided they are within the taxing jurisdiction, are also included. As stated in the case of Gomez u. Palomar, etc., et ol., sttpra, the taxing authority can select the subjects of taxation. Ib) the amount or rate of the tax; p) the purposes for which taxes shall be levied provided they are public purposes; (*) the kind of tax to be collected; (eN the apportionment of the tax, i'e., whether the tax shall be general or lirnited to a particular locality cr partly general and partly the situs of taxation; and (g) the method of collection' 'Going back to the purpose of taxation, as further elucidated by an eminent authority, the purpose of the levy is exclusively within the discretion of the legislature, but courts may determine whether the purpose is public or not. The legislature also has full discretion as to the persons, property, occupation or business to be taxed provided these are all within the state's territorial jurisdiction. It can also finally determine the amount or rate of tax, and lastly, legislative discretion atrso extends to the mode, method or kind of tax like property, excise, license, occupation or income tax (1 Cooley 176-184).
URAI, PITINCII}LES
IS'I'IIF]POWT]RTOTAXTHEPOWEBTODESTBOY?
so \, r rrrrlrrrg t,o <-rne clecided case, the power to impose taxes,is one
,rr,lirrrrlt'tl itr fbrce and so searching in extent so that the courts ,,r,rrr.1,! vcnture to declare that it is subject to any restrictions .- l,rrtlvo., gx(:(]pt such as rest in th" d59"q!&"gllbg-Agryrity which and at i.n!.r( rii(.r-r it,. No attribute of sovereifr-tffimore pervading' and constantly more affect government r," r,rrrrt tltles bhe power of made exactions the through than Uf" i,,rr,,rrrl.ly all the relation.if rrrrrl.r rt (Churchill, et al. u. Concepeion, etc',34 Phil' 969)' power' is Irr ltght of the foregoing description of the toxing t,t\,tltt,n, Lherefore, the power to destroy? ,lrrr,l'.lustice Marshail of the u.s. supreme court, in the notable r ,,r,,, ,r1 Mt'Culloch u. Maryland (U'S' 4 Wheat' 316' 4 L' Ed' 579)' thelgggr to destrpy' r,, r, I, l,, w r I lr(' rule that the power to !q4-14yglye! pory9to tax a it@ there when 6nly pertinent tl,, t,r rrrciple is right to to a case wffi6h s,,,, L,:,rlrrr subject and has ,ro "*l"tiot' r!,q i'xr:rl,s" This oft'quoted maxim instead of being regarded as a power l,l,r rr li r,l u trthorization of the unrestrained use of the taxing l,,r ilry rrrrd all purposes, irrespective of revenue, is more reasonably and eeonomic , ,,,, ,t ,l,r,,r[ as anepigrammatic statement of the political may outrun nation or state a of needs financial ,, n.!rn I lrrrt since the by taxation needs those meet power to the so ,, , r 1' lr r ruln calculation, or burdensome become taxes the though ,ri'it rrrt. be limited even ,,,r,lr:r('rt,ory. To say that "the power to tax is the power to destroy" ,, q,,,l.scriteggt tle prrpo.", for which the taxing power may be power may be rr,,, rl l,ttl. the d&ree oili6or with which the taxing , ,,,1,1,,yr'1I i., o.f,6" to -raise rg-v-gUue (l Cooley 179'181)' r
r
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(.()NSTITUTIoNALRESTRAINTSRE:.TAXATI0NISTHE
l,t twl,llt To DESTROY." It is important to note, however, that ,r Irrl,. t,rrxation is said to be the power to destroy, it is by no means irrrlrrrrrt,trd. According to an authoritative opinion, when a legislative l,,,ily Irrrving the power to tax a certain subject matter actually to ,ilrt,,,:;('s ou.I', u burdensome tax as effectually to destroy the right validity the tax' tothe l,, i l,rrn the act or to use the property subject ,,t I lll' r,nuctment depends upon the nature and character of the right r,, rllril,roy. If so great un ubr,r" is manifested as to destroy natural couid consistently rr I I I r I rrtlamental rights which no free government such an act judiciary hold to , r,,lrrtt', it is the duty of the , r r,, rrrsl,itutional (Ibid'). 'l'lrut, is why it can rightfully be said that while the power to tax r', llr. llower tl destroy,"it is equally correct to postulate that the I
r
(
LAW OF BASIC'I'AXATION IN'I'I
I I.]
"power to tax is not the power to destroy while the Supreme Court sits," (1980 Bar question) because of the constitutional restraints placed on a taxing power,that violates fundamental rights. In any other case, however, since the taxing power knows no limits except those expressly stated in the constitution, it must follow that if a tax is within the State's lawful power, the exertion of the power may not be judicially restrained because of the results that may arise from its exercise. Thus, it has been held that a federal excise tax upon artificially colored oleomargarine may be prohibited entirely without any violation of fundamental rights (see 51 Am.
Jur.
80-81).
The Supreme Court, however, reminds us that although the power of taxation is sometimes calied the power to destroy, in order to maintain the general public's trust and confidence in the Government, this power must be used justly and not treacherously (Roxas, et aL. u. CTA, et al., L-25043, Apr. 26, t968). Hence, where it appears that the taxpayers, in order to accommodate the Government's program of providing land for the landless tenants, took it upon themselves to pursue that program by subdividing a large tract of land owned by them into smaller lots and selling them to said tenants at cost, there was no Iegal basis for the Bureau oflnternal Revenue to consider them as being actually engaged in business and subjecting them to the real estate dealer's tax. Furthermore, it was held that there was also no basis to assess the income tax as though the land sold by them was a business or ordinary asset. It was further ruled that since the taxpayers were acting only in response to the Government's desire to ameliorate, unable as it was to finance the purchase of the large tract of land from the taxpayers, assessing them as ifthey were actually engaged in the real estate business would run counter to the principle that although taxation is the power to destroy, such power must not be used treacherously.
Taxpayers owe honesty to the Government
just as the
Government owes fairness to taxpayers (Cornmissioner of Internql Reuenue u. Tokyo Shipping Co., Ltd., etc., et al., supra). In thrs case involving a tax refund which, incidentally, is also a part of the tax spectrum, the Court, in unmistakable language, said: "x x x Fair deal is expected by our taxpayers from the BIR and the duty demands that the BIR should refund without any unreasonable delay what it has erroneously collected. Our ruling in Boros, et al. u. CTA, et al., supra, rs apropos to recall: 10
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"l'lrr' powcr of taxation is sometimes called also 'fherefore it should be exercised wrl,lr r:rrrtLion to minimize injury to the proprietary lrlr,lrl,s of' a taxpayer. It must be exercised fairly, r,r1rr:rlly irnd uniformly, lest the tax collector kill the 'lrt,rr t,hat lays the golden egg'. And, in order to rrurirrl,itin the general public's trust and confidence in {lrr. (lovernment this power must be used justly and rrot, t rcilcherously."' I
Irr, powt,r t,o dcstroy.
l'( )Wl,llt OIr JUDICIAL REVIEWIN TAXATION. In the case ( ' rrrr rtt i:;:;ion,er of Internal Reuenue u. Lingayen Gulf Electric Power r ,, lrtr' (l ,-2377L,Aug.4, 1968), the Supreme Court ruled that courts ' ,r r m,{ rrrrluire into the wisdom of a taxing act. As opined by Judge | 'r,r,lr,r,' , r'orr rts cannot review the wisdom or advisability or expediency ,,1 ir I ir x 'l'lrc judicial tribunals of the State have no concern with the t,,,lr, 1 ol lt'gislation. The judicial power cannot Iegitimately question , r r r I u r;r' to strnction the provisions of any law not inconsistent with llr, lrrn,lrrrrronl,al law of the State. Nor can the motives which have rr,llrr,.ncltl t,he selection of objects for taxation or determined the ,rrr 1,,, rrrtluired into (/ Cooley 165-169). 'l'lr. lrot,l,om line as far as judicial non-interference is concerned r , I lr r'. As long as the legislature, in imposing a tax, does not violate ,r s,;,1 r, r lr lt constitutional limitations or restrictions, the courts have ,,, , i,.('('r'n with the wisdom or policy of the exaction, the political or ,,tlr, r .,llirtcral motives behind it, the amount to be raised, or the 1,, , ,,rr:r) lrroperty or other privileges to be taxed (51 Am. Jur. 77-78). lrr, rrltrrtally, the Court's power in taxation is limited only to the ,r 1, ;, r, ;r l rorr and interpretation of the law. Therefore, the petitioner's ,r r 1,, rrr.rrl. t.hat the affixture of the documentary stamp on freight r ',i ,.rl)lr; is irnpracticable should not be entertained because according t,, tlrr'(burt in a decided case, the impracticability and absurd , ,,r' (^(lucr)ces of the law should be addressed to the legislature and ,r,lr rr rn rsl.rative authorities. Courts merely apply the law as they find rt 1/lr;rr-yrr Land Transportation Co., Inc. u. Collector of Internal lit r,,'ttttr. 105 Phil. 1338 [Unrep.]). 'l'lrc sirme principle was stressed in another case where the Court ,rrrl llr:rt it is not within its province to inquire into the wisdom of I lr,. lr r w lirr indeed courts are bound by the words in the mouth of the l,r\\'rurfrt'r- "A uerbo legis non est recedendum" (Commissioner of t'n:;tt'nts u. Mqnila Star Ferry Inc., et al., L-31776'78, Oct. 21, 1993)' ( 'r,rr r.l r; lrirve no authority to pass judgment upon the taxation policy
,,1
,
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of the Government. It is inherent in the power to tax thaL the State be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from singling out of one particular class for taxation, or exemption, infringe no constitutional limitation' (Commissioner of Internql Reuenue u. Santos, etc., et al., G.R. No. 119252, Aug. 18, 1997).
It is interesting to note that the principle of judicial non-interference into questions of tax poiicy could probably extend also into the administrative realm. In one case, the BIR in its Revenue Memorandum Circular No. 47-91 reclassified copra as a "non-food" agricultural product, the sale of which by the primary producers are exempt under the value-added tax law. The reclassification was assailed by the copra dealers contending that the same was counterproductive. In resolving the issue, the Court ruled that the question as to whether or not the BIR's reclassification is counterproductive could be properly addressed to respondents Secretary of Finance and Commissioner of Internal Revenue or Congress (Misamis Oriental Associatioru of Coconut Traders, Inc. u. Department of Finaruce Secretary, G.-R. No. 108524, Nou. 10, 1994).
ASPECTS OF TAXATION. Taxation embraces two aspects or phases. One is the levy or imposition of the tax on persons, property or excises; the other is the collection of the taxes already levied. Levy, whch is a legislative power, includes the determination of the persons, property or excises to be taxed, the sum or sums to be raised,
the due date thereof and the time and manner of levying and collecting taxes.
Jur.
35).
l,lltAl, l'ltlNC I l')l,lrS
. li 'l'lt|or(Lit:ul ,Justice - A good tax system must be based on the t{rrrr1,r,r"s rrtrtlity to pay. This suggests that taxation must be mandate that 1'r,,1'r r'rrsiv(| cclnformably with the constitutional ,',,,,,,,,,rrr shall evolve a progressive system of taxation (Sec' 28[1]' lrt |1, t9tl7 Constitution). ,t .,ltlrninistrq,tiue Feasibility - Taxes should be capable of being
it must not lay down obstacles to business development. The value-added tax law ryAT) "conomic r,,ulrl lx.r:il,ecl as an example of administrative simplicity. Speaking r,l tlr,, VA'1. law, the supreme court said that the law "is principally irtlu.rl I.o rirtionalize the system of taxes on goods and services, ,rlrrrl,lrly t,itx administration and make the system more equitable to Frrrrlrlr. llre country to attain economic recovery" (Kapatiran Ng Mga t\,rliltlttrllllteJ sa Pamahaloon rtg Pilipinas, Inc., et al' u' Tan', etc', r; li /Vrr.,\131 1, June 30, 1988 and companion cases). 'l'rr xrrt,ion could also be enhanced through the exercise of police classify Iu11,,.r ll' rrnder the police power, a local government can Iturrl.i ir:; rcsidentiai and commercial, then, since conversion of tl,luirlr.rrrl Iands is usually aSSeSSed on a higher assessment level, of Appeals, 1,1 q r rrf lcr:fions are increased (see Patalinghug u. Court t.t ,rl . ( i /t. No. 104786, Jan. 27, 1994).
i,ll,,r I rvcl.y cnfbrced.. Hence,
gr,,rlllr
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I ;\ x A'l'tON DISTINGUISHED FROM POLICE POWER ;1N I ) l,:M INENT DOMAIN \ /ir tttlion u. Police Power . L'l:; t,o Purpose - Taxation is levied for the purpose of raising through I r \.r,il il ( .; 1rt-rlice power is exercised to promote public welfare 1, ;,,rlrrl
tttlls.
Amount of Exaction - In taxation there is no limit; in the exaciion should only be such as to cover the cost of or surveillance' 1 r,grrr lrr(,iotr, issuance of the"license direct benefit ._ :t ils to Benefits Receiued, - In taxation, no special or Government the fact that the than other taxpayer by the t;r |,rr'('rV()d ,,il1y rrr,r:urer to th".itir"n that general benefit resulting from the property and welfare of all (51 Am' 1,1,,1,', lirrn
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BASIC PRINCIPLES OF A SOUND TAX SYSTEM ,L. Fiscal adequacy - The sources of government revenue musl be-sufficient to meet government expenditures and other public needs]TEis:-is essential in ord.er to avoid budgetary deficits and to minimize foreign and local borrowings. A court ruling describes fiscal adequacy as one of the characteristics of a sound tax system which requires that sources of revenue must be adequate to meet government expenditures and their varialions (Chouez us. Ongpin, etc., et ctl. G.R. No. 76778, June 6, 1990).
t
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,
Collection (including assessment) consists of the manner of enforcement of the obligation on the part of those who are taxed (51 Am.
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In the exercise of police power, however, t,his limitation does not applv.
5. As to Transfer of Property Rights - In taxatio.r, taxes paid part of the public funds; in police power, no transfer, but only restraint on the exercise, of property rights exists. become
B.
Taxation, u. Eminent Domain
7. As to Nature of the Power Exercised - Taxation is exercised in order to raise public revenue; eminent domain or expropriation is the taking of private property for public use. 2. As to Compensation Receiued - In taxation, payment of taxes results in the general benefit of all citizens and inhabitants of a State;in eminent domain, a direct benefit results in the form of just compensation to the property owner. 3. As to Noru-Impairment of Contracts - In taxation, a contract may not be impaired; this is not so in eminent domain. 4. As to Persons Affected - Taxation applies to all persons, property and excises that may be subject thereto; in eminent domain, only a particular property is comprehended.
TAXES DISTINGUISHED FROM OTHER IMPOSITIONS
l.
Toll - ToIl is
a demand of ownership
* an amount charged for
the cost and maintenance of the property used/tax is a demand of sovereignty for the purpose of raising public .5u"n.,". f t should be noted that the Local Government Code authorizes thd collection of tolls by local government units for the use of any public road, pier or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by them (Sec. 155, Local Gouernment Code). 2. Penalty - Tax is a civil liabiiity. A person is criminally liable in taxation only because he fails to sptisfy his civil obligation to pay taxes (Republic u. Patanao, supra)1On the other hand, penalty is a punishment for the commission of a crime. Incidentally, in the case of National Deuelopment Company u. Commissioner of Internul Reuenue (G.R. No. 53961, June 30, 1987), the Supreme Court ruled that if a withholding agent like NDC fails to withhold the requisite withholding tax on the income received from Philippine sources by a Japanese non-resident foreign corporation, such withholding agent (NDC) is liable to pay the tax that it did not withhold as a "penalty" for its failure to withhold the tax of the foreign corporation (see also Sec. 251, 1997 NIRC).
L4
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I rr lrr xirt;ion, there are so-called civil or administrative penalties Itl,,, llrr, 2l-r(Zr strrcharge for failure to pay the deficiency tax within tll. lrrrrr' prescribed for its payment in the notice of assessment, or l,rrlrrll l,o pay the fuII or part of the amount shown on any return l,,tun'r'rl l,o be filed under the provisions of the Tax Code or rules ,rrrrl lr,lirrlations, or the full amount of tax due for which no return is r ,,,1r r r rt,rl t.o be filed, on or before the date prescribed for its payment f i.r :t.1,\l3l and [a], 1997 NIRC). '.1 ('ornpromise or compromise penalty - This is neither an inr;',rrrl,iou nor a penalty, but it is an amount that is collected as a r,rrrpr,nrise in cases involving ylglglig-Os of the Tax Code, rules or 1,,11 rrlrrl.ions. A compromise penalty cannot be imposed by the I ,,runrr:isioner (Collector of Interrual Reuenue v. Uniuersity of Sto. l't,nttt:;, tl. al., 104 Phil. 1062 [Unrep.]).It a taxpayer refuses to pay tli',,r,nrpromise, criminal action is the remedy. ,\lllrough compromise penalties cannot be IegaIIy imposed, | illtrrr trr'l I'i.neda u. Collector, CTA Case No. 364, Nou. 19, 1963), they lr,r\. lr()wever, be collected if the taxpayer has expressed his ,: r I I r li rt.ss to pay the same. Hence, in connection with the taxpayer's rr g'1,r,rr I irr Lhe CTA, said court may sentence the taxpayer to pay the ,,,irt,r'i)urise penalties agreed to by him as part of the judgment lr ,,rrurussioner of Internal Reuenue u. Guerrero, L-19074, Jan. 31, rr
r
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I '\1tct:ial Assessment - A special assessment (1) is levied only nrr lrrrrrl, unlike a tax which is imposed on persons, property and ,: e, r,i,.: r, ( 2) cannot be made a personal liability of the person assessed; r lt ru lrrrscd wholly on benefit; and, (4) is exceptional both as to time arr,f 1.,'rrlity (1 Cooley 107-108). llrrr,'r,special assessments are not taxes within the constitutional
,,r ,rlrrlrrl,ory provisions on tax exemptions, it follows that the !.c,,urplion under Sec. 28(3), Art. VI of the Constitution does not
qlrIl 1' I r, sllecial assessments. 'l'1r,, r:onstitutional exemption granted under the aforecited , lr i \'r1r(,n oI the Constitution covers charitable institutions, churches, ,lr,l lrir rirollages or convents appurtenant thereto, mosques, non-profit 1,1rs111rl1r1i1ve, and all lands, buildings and improvements actually, directly srrrl t,xt:ltrsively used for religious, charitable or educational purposes.
ll
rrr important to note, however, that under the proviso to li lO o1'the Local Government Code, special assessments (or ':1,,,, rr I lt,vics) do not apply to properties exempt from the basic real lrrrrlrr,r'l.y t,rrx under Sec. 234, aLso of the Local Government Code. \ 111,rrli ( lrc properties which are tax-exempt under Sec. 234 are the
!i.r
t5
T
l,AW Ol,' ltASl()'l'AxA1'l0N IN'l',ll l,l l'llll,ll'l'lNI'ls
properties mentioned in the above-cited provision of the Constitutiol. It would seem, therefore, that in view of the exempting proviso in Sec. 240 of the Local Government Code, properties which are actuaily, directly and exclusively used for religious, charitable and educational purposes are not oniy exempt from real property taxes but are exempt from the imposition of special assessments as well' The nature of special assessments can be better understood in light of Sec. 240 of the Local Government Code, the pertinent portion of which reads as follows: "A province, city, or municipality may impose a special levy on the lands comprised within its territorial jurisdiction specially benefited by the public works projects or improvements funded by the local government unit concerned; Prouid.ed, howeuer, That the special levy shall not exceed sixty per cent (60%) of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith. x x x" 5. License Fee (a) A tax is levied in the exercise of the taxing power; Iicense fee emanates from the police power of the State. It has been ruled that regulation and taxation aie two different things, the first being an exercise of the police porvYer, whereas the latter is not (Serafica u. Trecrsurer of Ormoc City, et al., L-24813, Apr.28, 1969). (b) The purpose ofa tax is to generate revenue; whereas a license fee is regulatory (Victorias Milline Co., Inc. u. Municipality of Victorias, Negros Occidental, L'21183, Sept.27 1968). (c) The amount of the exaction or charge, if it is to be a license fee, must only be of a sufficient amount to include expenses of (1) issuing the license; and, (2) cost ofnecessary inspection or police surveillance (Cuunjieng u. Patstone,42 Phil.818; City of lloilo u. Villanueua, et ql., 105 Phil' 337). In this connection, it was ruled that where a permit collected from alien job applicants is in excess of the cost of regulation, the exaction is a tax (Yillegas u. Hiu Chiong Tsa.i Pao Ho, et al', L-29646, Nou. 10, 1975).Incidentally, exemption from tax does not include buiiding permit fee and special assessments (Apostolic Prefect of the Mountain Prouince u. City Treasurer of Baguio, 71 Phil. 547) asthese are not taxes but regulatory fees in the case of the license fee, and Ievy on account ofbenefits to land for the special assessments. In one case, the Supreme Court said that if the purpose is primarily revenue or if revenue is at least one of the real and substantial purposes, then the exaction is a tax#ence, the Court
I
16
( I I,lN
l,lllAl, l'll,l N(ll
t'l,FlSi
l,' l,l rlr,rl rrrol,or vclricle registration fees are taxes because the li,pr.,lrrlrvr.rrrt,r'nt, is urainly to raise funds for the construction and iri,,rrti urrrr:r,ol lrighways and, to a much lesser degree, to pay for 1lq, , r t,,.ilir(,ri ol't,he l,and Trasportation Office, a regulatory agency .t rl,, ( l.vtrn tlt'nl, (Ph,ilippine Airl,ines, Inc. u. Edu, etc., et al., i I t ;', ;. .ltt1i. 15, 1988). It should he noted that the ruling in t,.1 t,t,tr, r, I'ltilippin,e Rabbit Bus Lines, Inc. (L-26862, Mar. 30, r,r,rr r,,llr,,t,l'lcr:t,t,hatmoLorvehicleregistrationfeesarenottaxes l,rrr t, r
lr:rr lrccn superseded by said decision. ll,,rr,.r'r.r', it, should be noted that in the case of license fees for ,t.r, ,r ., lrrl or:r:rrpations," the exaction may be very large without ,, rlr lr.irr14 a tax. This is so because under the general welfare 1,,,, , rrrrrrrrt ilral corporations are authorized to enact ordinances r, g,r, r,l,. lirr t,lre health and safel,y and to promote the rnorality, 1., ,', ,,rrrl llt,rrcrai welfare of its inhabitants (Physical Therapy |'|,. , tt ,tttt)tt ol Lh.ePhilippines, Inc.u.MunicipalBoardaf theCity tl.,'ril,t, l0l llh,il. 1142). I l, r , , li rrrrls of licenses are recogrtized in the law: (1) Iicenses for rtr, r,r,rrlrrlron of useful occr.tpations; (2) licenses for the regulation .r |, Ltr r( lr)n of non-useful occupations or enterprises; and, r ir lr,, rr r':; ltll'feVenUe Only. I I r r r.i t,worthy that non-payment of a license fee for a business :,r,r l, ' tlr;rl lrrrsiness illegal. Howevet:, non-payment of a tax for a t,,r , ,, rl,r'si not necessarily make that business illegal although r t, r ,,, ,1' lr I lrt' a ground for criminal prosecution against the person i t., , !,r, , r,ioltrting the law. I ,rr I lrr.r'urore, not only businesses rn'hich are lawfully conducted i ,. rlrli l,lven -those businesses lvhich are carried on itr.legaliy 1,. rrl,1,,, t lo Lax. For exampie, the'value-added tax (VA?) may be ,l ,n t,he illicit production and sale of cassette tapes. Tax i, , r,,( rls rnay even extend to the income that is realized from rl,, ,,1,.,,1 llrcse tapes because income from illegal sources is also r.,.,,1'1,,
it r rrrlr,r'r'sting bo note that under the Local Government Code, ,,,,r,,r, rt,;rlr(rt's (and cities) are authorized to impose regulatory fees' I Ii ,rl r;rrid Code provides that municipaiities may impose and ,,11, , I ,rr, lr rcasonable fees and charges on business and occupation, ,irr,I rr ri r.pl irr the case of the professional tax) on the practice of any t,,,,1, r,rn ()r' caliing commensurate wit]r the cost of regulation, i,, r,,, tr'), ;rrrrl licensing before any person may enpia€ie in such i,,r rr,, ,rr.()(rcllpation. or practice o{'such profession or calling l!,1. Lttr:ol, Gauerrumen.t Code). ir I 1?
r
t,n
w olf liASlc,l'AxA,lloN lN,t'llH t,Illl,ll,l,lNl,)s
A long line of decisions has held that to be valid, an ordinance must conform to the following substantive requirements: (1) It must not contravene the constitution or any statute; (2) It must not be unfair or oppressive; (3) It must not be partial or discriminatory; (4) It must not prohibit, but may regulate, trade; (b) It must be general and consistent with public policy; and, (6) It must not be unreasonable (Magtajas, et al. u. Pryce Properties Corp., Inc., et al., G.ft. No. 111097, July 20, 1994). 6. Margin Fee - This is not a tax but a currency measure designed to stabilize the currency such as the exailioEbr-a certEin fee under R.A. 2069 on the remittance of profits earned. in this country (Esso Stand,o,rd, Eastern, Inc. u. Commissioruer of Internal Reueruu.e, L.28508-09, July 7, 1g8g). 7. Debt - A tax is not a debt because it is not an obligation that is created by contract, express or implied. A tax is an obligation imposed by law. It, therefore, follows that if a taxpayer fails or refuses to pay a local tax on tenements or apartments, he is liable for criminal prosecution. He cannot plead immunity from criminal Iiability under the constitutional provision which states that "no person shall be imprisoned for non-payment of a debt or poll tax', (Sec. 2A, Art. III, 1987 Constitution.;see also Villanueua u. City of Iloilo, L-26521, Dec. 28, 1965). Inasmuch as taxes are not debts, it follows also that the two obligations are not susceptible to set-off or compensation under Art. 7279 of the Civil Code. In the case of Republic u. Mombulao Lumber Company (L-17725, Feb. 28, 1962), the Supreme Court categorically ruled that taxes are not subject to set-off or compensation. In another case (Francia u. Intermediate Appellate Court, G.R. No. 67649,,{une 26, 1988), the Court also held that no compensation is legally authorized where it appears that the parties involved are not creditors and debtors of each other (see Art. l2Tg, Ciuil Cod.e). In that case, what was sought to be set off against the taxpayer,s real estate tax liability to the City of Pasay was the amount of money that he (the taxpayer) was supposed to receive as payment for his property that was expropriated by the National Government. The Court applied the Mombuloo ruling. A corporation's outstanding claims for reimbursement against the oil Price stabilization Fund (oPSF) cannot be offset against its contributions to said fund. P.D. 19b6, as amended by E.O. 1BZ, explicitly provides that the source of the oPSF is taxation. A taxpayer may not offset taxes due from claims that he may have against the L
18
(I
llN l,lltAL 1) ltl NC tI']l,ltlS
{rrr.r rrrrrrrrrt, ((]oll cr Philippines, Inc' u' Commission on Audit' nttt,ttt) 'l'ttxcs and debts cannot be the subject of compensation creditorS 1,,,, irill1t, l,he Oovernment and the taxpayer are not mutually demand, a debt, not is for taxes a claim and ,ilr, I, l,,l rl ors ol' cach other (Ibid")' oft set be to allowable is r rrnlr '('l rrr iudgment as It l$ interesting to note in this connection that although taxes .,,, vrrrl tlcbt.s, tlie ruling in one decided case holds that a tax may debt. For a clearer understanding of taxes lrir r I ir I r' ol' t,hc nature of a the following excerpt is quoted, thus: itself, ,irIl ,l,.lr(.s rrncl the ruling ,,,l,here is a material and fundamental distinction between Debts ;r I rr x ir ttd a debt (Meriwhether u' Garret, 102 U'S' 427)' while capacity' corporate in its Government ,rr,' rlttt' t,cr the capacity' sovereign its in Government the to Irrrt's rlre due ,\ rlobt, is a sum of money due upon contract, express or rrrrpliotl, or one which is evidenced by judgment' Taxes are rrrrlrost,s ievied by the Government for its support or some ',;r,'r'i:rl prrpo"", which the Government has recognized' li,,*,'r.rr, tax in a broad sense may be a debt, so that interest .rr cst,ute and inheritance taxes may be deducted as interest ,,rr irrtlcbtedness" (Commissioner of In'ternal Reuenue u' I',tlrrrr,<:a, Jr., L'16626, Oct. 29, 1966 citing Camden u' Finch ( irrrlc and Coke Co', 61 ALR 584)' 'l'lr:rt, portion in the abovecited ruling which speaks of the rlstlrr.trbiiity of interest on taxes should be carefully analyzed. This r1r1r.,rlrrrn nray be asked: In, light of the existing law, can it be said' tlt,rl rrr trLL cases, interest on, taxes may be deducted? The answer to tlrr,, ,1rrt'sl,ion should be qualified. As regards interest on taxes that or business' ,r r I r r0I tronnected with the taxpayer's profession, trade allowed. is not ,t,,.nrsi deduction rr that 'l'lu,'r is so because Sec.29(b)(1) (now, Sec' ?a[B][1] of the Tax t ,,,lt rtf' lggf),on the deduction of interest, speaks only of the "amount ,,1 rrrlr,rt'ct paid or incurred. within a taxal:Ie year on indebtedness rirt ilr.r.(,(l in connection with the taxpayer's prOfession, trade Or
I
Irlt !tll{'S$ X X X."
ll, st:ems, however, that under existing law even in the case of , rtr,,,r,1rj or resident aliens who are self-employed (persons who are , rrgirrlit'tl in business and those who practice their profession in the t,t,, t,1'f ines), the deductibility of interest on indebtedness is limited ,,rrly lo interest paid or incurred within a taxable year on loans ,,,rrirrrr:t.cd from accredited financial institutions which must be with the conduct of a lrrr,\,r,n t,o have been incurred in connection I rr t ;rir.yoI''s profession, trade or business' 19
l,AW Olr lJAtil()'lAXAl'lON
lN'l'll
l,)
I'ltl l,l['l,lNl,]S
Considering the above observations, thcrclbre, iL would seern thut, in the case of individuals, deductibility of interest on taxes is no Ionger authorized if those taxes are not in any way connected witlr profession, trade or business. Hence, if, for example an individual taxpayer incurs a liability for the payment of, or actually pays,
interest on his personal income tax or on donor's gift tax, the
deduction is not authorized. How about corporations and taxable partnershlps? Appiying the aforecited Sec. 29(b)(1) (now, Sec. 3a[B][1], 1997 NIRC), it would seem that deduction ofinterest on taxes is legallyjustified provided that the taxes paid or incurred are in connection with the taxpayer's trade or business.
.t It is significant to note that in the case of Domirugo, etc. u.
Gq,rlitos, etc. (L-18994, June 29, 1963), the ruling seems to deviate from the principle that taxes and debts cannot be compensated against each other. In that case, what appeared to be a due and demandable debt of the Goyernment to the estate of the late Walter Scott Price (as payment for the latter's services), was allowed as a set-off against the transfer taxes due from the decedent's estate. The Court opined that when two obligations are both due and demandable and all the requisites for a valid compensation are present, compensation of the two obligations takes effect by operation of law (citing Arts. 1279 and 1290, Ciuil Code).
May the taxpayer, howeuer, set off his pen.d.ing unapproued, refund of a tax for a preceding year again.st his tctx liability for a subsequent year? Formerly, under the oid provisions of Sec. 51(d) of the Tax Code, the set-off was legally possible. As a matter of fact, in the case of Comm.issioner of Internal Reuenue_u,JJSE9n.S.uyae Mines, Inc., et al. 1L,ZSZO9, July Zg, tg6$;tEe ruling was to the efTect that a pending claim for refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner. In light of the present Tax Code, which contains no similar provision upon which the ltogon-Suyoc ruling was based, it is doubtful whether a pending claim for refund may still be appiied against an existing tax liability. Mini,ng Corporation ,tq f The matter has now been settledin Philex q,l. (G.R. No. 125704, Internal u. Commissioner of Reuen,ue, et il,rrl il Aug. 28, 1998) where the Supreme Court categorically held that "x x x Philex's reliance on our holding tn Comruissioner of Internal. Reuenue u. Itogon,-Suyoc Mines, Irtc., wherein we ruled that a pending refund may be set off against an existrng
*
I'
on
(
i
IIN UITNI, PIiI NCI I'I,US
t,r, Irrrlrilit,y evon though the refund has not yet been approved l,r llr,, (lornrnissioner, is no longer with any support in .rlirlrtl,rry luw. ll is irnportant to note that the premise of our ruling in rrlirretrrcntioned tlr,. case was anchored on Section 51(d) of tlr,, [r]rrl,ionill Internal Revenue Code of 1939. However, when tlr' N;rlional Internal Revenue Code of 1977 was enacted, lri, rn n rr, llrovision upon which the ltogon'-Suyoc pronouncement ,r',r'' l,;uic([ was omitted. Accordingly, the doctrine enunciated 111 l1,,1ytrr.-Suyoc cannot be invoked by Philex."
t
fll,tt, rtn (xl:ess payment of quarterly corporate income tax for year be automatically credited or applied tlr, rtt'it tt1t lltc corporation's estimated quarterly income tax liobilities t,t \ttl,le quarters of the succeeding taxq.ble year? !rt1 ,llt, y,r,.,','rli,rr.g taxq,ble
rl
-i'F*i, lrr'r ,lu(,stion may be answered in the negative. In the case of {F ,,, ,',r,1,,:; Milling Co., Inc. u. Commissionei of Internal Reuenue, et ,,1 rtl lt No. 103379, Nov. 23, 1993), the Supreme Court ruled as lrill,,'r", 'll is difficult to see by what ratiocination petitioner insists ,rh llr,' lrl.r'rir.I interpretation of the word 'automatic.' Such literal lrrtr r1rr,,1;rlion has been discussed and precluded by the respondent ,rrrrt 1" \s decision of 23 December 1991 where, as aforestated, it +rrl, ,l ll',rL\'once a taxpayer opts for either a refund or the automatic f ,1 a r lr.rlrl scheme and signified his option in accordance with the *:.pr1f ,1lr,,rr, t,his does not ipso facto confer on him the right to avail
immediately. xxx' Prior approvalbythe Commissioner ,rl lrrlr rrr;rl llevenue of the tax credit under then Section 86 x x x cr.rlrl :rlrt)r,ar to be the more reasonable interpretation to be given tr, ,,irrrl :r,,cl,ion. An opportunity must be given the internal revenue l,i,rl, l, ,rl (,he government to investigate and confirm the veracity of | 1r,,, I ir r nr ri of' the taxpayer.' x x x (I)nsofar as the option of tax credit +- , ,tr ,.r'n(r(1, this right should not be construed as an absolute right + lrr, lr r,; rrvirilable to the taxpayer at his sole option. x x x" Automatic r l.rIrI r:r nol trvailable, but this does not mean that petitioner cannot s.:,.t ;r r,.lrrnd or credit of the excess quarterly payment. ll ttl tlt,e "non-automatic crediting" rulin,g in the Sq.n Carlos trltllttrsi,'ttsc, howeuer, apply to indiuiduals who, under Sec. 67 (now, 'rr r i I rtl t,h.e Tax Code of 1997), &re required to file quarterly returns ttl titt t,ntt' l.ax on o cumulatiue bq,sis? 'l'lr,' rrnswer to this question would seem to be in the negative' ,\,, ,,r,lrrr1; t,o Revenue Regulations No. ?-93, any excess of the total rlrrrrr l.r'ly payments and taxes withheld over the income tax computed lt I lr, l'r rrrr I incomp tax return may be applied as a credit against the ,rl i lr,,,rrnl
27
OENERAL PRINCIPLES
LAW OF BASIC TAXATION IN THII PHILIPPINEg
quarterly income tax liabilities for the taxable quarters of t immediately succeeding year. This is available to individuars w desire not to await anymore the processing of any tax refund. to whi
ihey are entitled. In case the payments credited are not completely utilized ot applied in the taxable quarters of the immediately succeeding year bhe remaining amount shall be claimed as refund or credit by taxpayer pursuant to Sec. 204 of the Tax Code (see Sec. i, Reu. Reg No. 7-93).
It should be noted, however, that in the aforecited. case, was no taxable income, but instead, there was a net loss in immediately succeeding taxable year of the corporation against w the application was sought to be made. Under Sec. 76 of the Tax Code of 1g77, in case the corporation ! entitled to a tax credit or refund of the excess estimated quarter income taxes paid, the excess amount shown on its final adjustmer return may be carried over and credited against the estima quarterly tax liabilities for the taxabie quarters of the succeedind taxable year. Once the option to carry-over and apply the excesi quarterly income tax against ihcome tax due for taxable quarters o: the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application cash refund or issuance of a tax credit certificate shall be allow therefor. 8. Regulo.tory fees - May q,n exaction be both a tatc as well as regulatory fee? Tt would seem that this is possible, as in the case Iicense taxes. Incidentally, a law iike P.D. 198T which regulates th videogram industry may validly impose a tax of B0% on the g receipts of videogram operators. In the case of Tio u. Videogram Regulatory Board, et al. (G.R. No. 75692, June 18, 1g8Z), it was held that the provisions of sec. 26 of the constitution which requires tha every bill must contain only one subject which must be expressed in the title thereof is not violated. In Philippine Educational Publishers Association, Inc., et al. u. De Ocampo, etc., et ol. (G.R. No. 115981, Oct. 80, lggb), the Court explained that unlike an ordinary tax, a license tax is mainly for regulation. Hence, according to the Court, its imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. 9. Subsidy - A subsidy is a legislative grant of money in aid of a private enterprise deemed to promote the public welfare. It is not a tax althoirgh it may be necessary to raise the money to pay the 22
lrly lrv rlrtl&ns of a tax (1 Cooley 77). Subsidies are sometimes irt licu of tax exemptions, ll1, (iustoms duties and fees' These are duties charged upon orlitios on their being imported into or exported from a country €hHlsy 73). Customs duties are taxes, but a tax is a broader term larrludo not only customs duties but other taxes as well. Customs trtr rogulatory imposts on goods' 11, lleuenue - This is a broad term thai includes not only taxes lnCurne from other sources as well. Internal revenue refers to t ut,h0r than duties on imports or exports in the nature of excise auilh as taxes on tobacco, Iiquor, etc. (1 Cooley 75)l\,nl'nxation 'l'ribute - It has been said that tribute is synonymous with implies tribute from the governed to some form of telgnty (1 Cooley 78). lll, Irrupost - In its general sense' it signifies any tax, tribute or r, Irr its limited sense, it means a duty on imported goods and
l
Irntrrlise (1 Cooley 75).
BH
CLASSIFIED
r 1,
l'ersanal ?or - Also known as "capitation" or "poIl" taxes, nro baxes of a fixed amount upon all persons of a certain class to the iitl,t,r [he jurisd.iction of the taxing power without regard which in or businesses ()f property, occupations or the their i#srrrrl, Government Local of the the effectivity Before engaged. ftly rr,uy be p6,iu, 1,,,.ronal tax was exemplified by the basic residence tax' Under {klrle, however, the residence tax is now kn'own as "eoffii[runity Mure on this tax will be discussed in the chapter on local ilstt. on all t, l'roperty Tax '' Property tax-es are taxe's aesessed or all prop,erty'of a eertain class within the jurisdiction of g power '(/ Cooley 1 1 8). An example of property tax is the I lrrgperiy tax and additional levies on real property except special i$lmrn,:nts under the Local Government Code. More on these taxes *llt t u tahen up in the chapter on real property taxation' l|. Direct ?or - D,irect taxes are taxes whereiR both the incidence llability forthe paymeht of the tax as well as the impact or lg of the tax falls on the same persan. An example of this tax is ro tax where the person subject to tax cannot shift the burden Jl Uru tux to another person. Estate and donor's gift taxes are other Bluploe of direct taxes.
23
l,AW Ot,. llASl(),l,AXA't'toN IN .l,l,,l I,IllLll)l,tNl,l.S
4.
In,direct zor - Indirect taxes are t,axes wherein the incid.ence liability for the payment of the tax fals o" or" f""ron, but the burden thereof can be shifted or passed on to anoth". pu"rorr. The sales tax, now the value-added tax (VAT), is an exampie of an indirect tax. VAT is payable by any person who, in the course of trade or business, sells, barters, u*.hurrg", o" luu"u, goods or properties, renders services, and any person who imports goods. As an indirect tax, the burden-of paying the amount of tfr" ir" may be shifted or passed on to the buyer, trinsferee or ressee of the goods, properties or services (Sec. 105, lggf NIRC) _ Incidentally, w_hen the seller passes oru the tax to his customer, is he going against the principre tiat tqxes,re personar tiabilities the payment of which cq.nnot be transferred to aruother person? No, he ]s not going against the rule. when the serler puuul, on the tax to his buver, he is only shifting the tax burd.en tt e liability to pay it) to the purchaser as part of the cost of thelnot goods ol services rendered. "ord The nature of the indirect tax, as exemplified by the sales tax, has been discussed by the supreme court in the case ph,ippine of Acetylerue co., Inc. u. commissioner of Internal Reuenue, et al. (L-19707, Aug. 17, 1987). According to the court, the sales tax that is passed on to the purchaser as part of the p;.h;;;.i"u or tnu commodity is a tax on the seller, and not the buyer. Hlrrce, if the buyer happens to be tax-exempt, the seiler is nonetheless liabre for the payment of the tax as the same is a tax not on the buyer himself but is actually a tax on the seller. _In a case, however, where the transaction in itself is tax-exempt an-d the buyer pays the tax as part of the purchar" p"1.", it is the seller's obligation, in case he has obtained a refund oi the disputed tax, to hold such refunded tax in trust for the buyer (Coikctor of Interrual Reuenue u. Americqn Rubber Co., et i lOS6i, Apr. 50, of or the
I
"t.,
I e6s).
- Despite his right to shift, however, the seller may erect to absorb the tax himself (Maceda u. Macaraig, Jr., etc., et at., G.R. No. gg2gl, May 31, 1991). where, under an executive agreement between the philippines
and a specialized agency of the united Naticns like the world Health
Organization (WHO), the contractee (WHO) in a corstruction contract is designated as the tax-exempt party as where such agreement provides that said contractee is exempi from all indirect
taxes, the contractor under the said contract is actualry the person
who is tax-exempt as the clear intention of the executivl 24
ugru"-"rt
(I
I'N
T'
ITAL PII,INCII'L!]S
' t,, lr,rrt,['it. lhe contractee who will no longer shoulder the burden ,,t tlr,.r'onLrucLor's tax which contractors usual'Iy shift or pass on to rlr,,rr r'ust,orners and clients (Commissioner of In'ternal Reuenue u. t',ltrt (iolnmco a,nd Son.s, In,c., et al., L-31092, Feb. 27, 1987). Irr llrc above situation, it should be borne in mind that the ruie
rlrirt lrrx cxemptions are personal to the grantee is not violated l,i, rrrri(, t,he overriding intention of the contracting parties is to , i''url)l t,he contractor for the benefit of the contractee. ll,,trt ubout if the buyer himself is the one exempt, would he then t,, , rt t r tl,cd to cloim for refund of the tax that the seller might haue t,,t , .t'rl on. to |tim? Inasmuch as an indirect tax, iike the sales tax or \ \'l', lioes on to the buyer not as a tax, but only as a component of r l, ' t) r rt:hase price, it may be assurned that the buyer has no right to r
rrlrl
;r
rn lrrry refund.
llrrwover, if what is covered by the tax exemption grant are ,,' L'(,(:t, l,axes which sellers of goods and services usually pass on to t lr, rr r:rrstomers, then it may be said that there is a valid reason for ,, l l,,w r rrg the refund, 'l'lrrrs, in the case of Macedau. Macaraig, Jt., etc., et al-, suprQ., rlr,,(lourt ruied that the National Power Corporation (NPC), a 1..r i.r'nrnerlt controlled corporation, could justifiably claim for the , I rrrrrl of the tax on petroleum products that it had purchased from ,, \,{'r'aI oil companies, where it appears that under a number of tax , ,,, nr t)t,ion laws and presidential decrees enacted for said entity, its , r,,rnl)tion from the payment of said taxes was clearly shown. l,'or instance, the tax exemption grants to NPC mentioned NPC ,, lrr,ing "x x x exempt from aII taxes, duties, fees, imposts and ali ,,tlr,,r'charges imposed x x x on all petroleum products used by the ,,,r1roration," or that NPC's exemption includes those imposed ,lrrr,ct,Iy and indirectly," or when said grant stated that NPC's , \,'nrption covers "all forms of taxes, duties, fees, imposts, etc." Analyzing the Court's decision in the abovecited case, the several Lr x t'x€rlption grants in favor of NPC all point to only one thing: rir;r( the legislative intent is to grant immunity to NPC from the tax t lrrrt. oil companies invariably pass on to their buyers' ln other words, NPC's exemption herein is from the payment of r r, I i rect taxes - something which is quite different, for instance, from I lr(, cxemption from taxes for which the grantee is directly Iiable. It should be remembered in this connection that the liability for tlrc payment of the indirect tax lies with the seller of the goods or 'r.r'vices only, not the buyer thereof. Hence, it is important to find r
25
LAW Ot,'
BAtil(i'l'nx^'l'l()N I N't't
I
l,) I,l
ll l,ll,l,lNL.ls
out if the tax exemption grantcd t,o a t,axpir.ycr specifically includes the indirect tax which is shifted to him as pa rL of the purchase price; otherwise, iL is reasonable to assume that the tax exemption should embrace only those taxes for which the buyer is directly liable. Summarizing all possible situations involving indirect taxes, the following points are worthy of note: (a) When the consumer or end-user of a manufactured product is tax-exempt, such exemption covers only those taxes for which such consumer or end-user is directly liable. Indirect taxes are not included. Hence, the manufacturer cannot claim exemption from the payrnent of sales tax; neither can the consumer or buyer of the product demand the refund of the tax that the manufacturer might have passed on to him (Plr,ilippine Acetylerue Co. case, supra). (b) When the transaction itself is the one that is tax-exempt, but through error the seller pays the tax and shifts the same to the buyer, the seller gets the refund, but must hotd it in trust for the buyer (American Rubber Co. case, supra). (c) Where the exemption from indirect tax is given to the contractee, but the evident intention is to exempt the contractor so that such contractor may no longer shift or pass on any tax to the contractee, the contractor may claim tax exemption on the transaction (Gotamco case, supra). (d) When the law granting tax exemption specifically includes indirect taxes or when it is clearly manifest therein that the legislative intention to exempt embraces indirect taxes, then the buyer of the product or service sold has a right to be reimbursed the amount of the taxes that the sellers passed on to him (Maceda u. Macaraig, Jr., etc., et al., supra). In,cidentally, why is this particular tq,x known q.s arl "indirect tax?" It is called as such because the one who actually pays the tax (as part of the purchase price of the commodity or service) is the purchaser. The purchaser, in the other words, is "indirectly" paying the tax. 5. Excise Tax - Excise or privilege taxes are laid upon the manufacture, sale, or consumption of commodities within the country; upon licenses to pursue certain occupations and upon corporate privileges (1 Cooley 127). 6. Gerueral Tax - General taxes are taxes levied for the gcineral or ordinary purposes of the Government (1 Coaley 142). Exarnples of these are internal reventre taxes, the collection of which is trtilized for the general expenditures of the Government. 26
(I
l,lNI,lltAL
l'ltlN(lll'1,lls
7. SpeciaL Tax - Special taxes are taxes levied for special real estate tax levied under R.A. 1,.147 (now, Sec. 235, Local Gouernment Code) for the benefit of the prrblic school system. 'lhe Constitution provides that "(a)ll money collected on any tax lr,vied for a special purpose shall be treated as a special fund and p;rid out for such purpose oniy. If the purpose for which a special lrrnd was created has been fulfilled or abandoned, the balance, if ,rrry shall be transferred to the generai funds of the Government" 1Scc. 29[3], Art. VI, 1987 Constitution). 8. Specific ?or - This is a tax which imposes a specific sum by I lro head or number or by sorne standard of weight or measurement rr ntl which requires no assessment beyond a listing and classification rrf'the subject to be taxed (1 Cooley 143). Specific taxes on alcohol, Iobacco, etc., products are called excise taxes (Title VI, 1997 NIRC). g" Ad Velorem Tax - An ad ualorem tax is a tax upon the value rr('the article or thing subject to taxation. An example of an ad uulorem lor is the real property tax. tO. Customs Duties - The word "duty" is sometimes used in a gcneral sense as synonymous with "tax." Customs duties are duties r:harged upon the commodities on their being imported into or cxported from a country (1 Cooley 73). \1. Notional Tax - National taxes are taxes levied by the National (,lovernment. Sec. 6, Art. X of the constitution provides that "(1)ocal government units shall have a just share, as determined by law' in l,he national taxes which shall be automatically released to them'" l)rrrl)oses, such as the additional
1%o
1,2. Local Tctx - Local taxes are taxes levied by the local government. Locai government units are authorized to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments (Sec. 5, Art. X, 1987 Constitution). 73. Progressiue Tax - Progressive taxes are taxes imposed whereby the rate or amount of tax increases as the amount of the income or earning to be taxed increases. An example of progressive taxation is our present income tax system. The following table on the tax rates for individual citizens of and individual resident aliens in the Philippines shows a graduated tax system starting from 5"/o on taxable income not exceeding I}10,000.00 and a maximum of 34o/o if the taxable income is over P500,000.00 (Sec. 24[A][1][c], 1997 NIRC). 27
I,AW OII tsASIC TAXATION IN'I'III')
Over? l0,00Obutnotoverf
illegally disposed of are objects which were acquired l'rom private sources (Joya, et q'1. u. PCGG, et al', G''R' No' 96541' ,,lrt.g" 24, 1993).
rr
ToxDutis:
lf Taru,blnhwmeis: Not over?10,000
(I I.)N I]ITAL PHINCIPLES
I'IIII'IPI]INIIS
5%
30,000 ? 70,000 ?
Over? 30,000butnotoverP OverP 70,000butnotover?140,000
r() allegerl to be
500+ 10%oftheextpssover? 10'000 2'500+ 15% oftheexcessover? 30'000
? 8'500+20%oftheexcessover? 70'000 f 22'500 + 25% of ihe excess over?140'000 Over?140,000 but not over?250,000 f 50'000 + 30% of the excess over?250'000 Over?250,000 but not overf 500,000 f 125'000 + M% of the excess over?500'000 Over?500,000 Note:EffectiveJanuary1,1999'themaximumratewillbechangedtn33%and32%on January 1,2000.
whereby the tax Regressiue Taxes - These are taxes or earning to be taxed increases' decreases as the amount of income
14.
rate
|S.Proportioruate?or-Thisataxbasedonafixedproportionof U"i'u iu*"a' like the real estate tax which is the value of the ""Ui""i the property assessed' a fixed proportion of ti'" uui"" of the-re are several TAXPAYER'S SUIT' In our legal system' be maintained in our courts' instances where tu*puy*''* suits may that a taxpayer has the For exampie, in one'case, the Court ruled q";;tioning the.vatidity or constitutionalitv of right to file an ."ti;;-,-fri-ifr"ory tiat the expenditure of public funds a statute or law "rr purpoge-o{ administering or by an officer of tntCot'""t'*ut't for the invalid law constitutes a implementing an u"con"titutional or ql'' et al' u' Arroyo' etc" et misapplication of ,'"n f"tta" (Gascon" G.n. No' 78389, Oct' 16, 1989)' etc" et al" supra' it was In the case of Maced'a u' Macoraig' Jr'' philippines a-nd a taxpayer the herd that a d.uiy "i".i"a senator of to file an action for certiorari' thereof has the i;;;i;;;;itv legality of a claimed prohibition una *"u"rrau*r, to question the producls' since the refund refund of indirect taxes like the tax on oil legal basis' constitutes an illegal itself, if found ;;;;ihout expenditure of Public funds' held to have been A "derivative" or "representative" suit was also councilors of a were validly filed by a group of taxpayers who iilegal disbursemr:nL of an was there that city, where rt app-eared (City Councit of Cebu City public funds which emanated from taxes 31' 1972)' u. Cuizon, etc., et at', L'28972' Oct'
Inordertojustilyataxpayer'ssuit'itisnecessarythrrl'ptrblic suit would I'rrrl il"what
funds should be invoived. Thus, a taxpayer's
CASES
lll,lPUBLIC v. tsACOLOD-MURCIA MILLING CO" INC"
l,)'l'AL., L-19824-26, JULY 9, 1966 !'ACTS: This is a joint appeal by the above-named sugar centrals Manila finding them t r., r* a decision of the bourt oi f irst Instance of 632 (charter of R'A' under assessments lrrrble to pay special of F0'10 per tax a imposes 632 R'A. l'lrilippine Sugar Institute)' tax to be borne by the 1,',',,1'of sugar-collectible for five years' such in proportion to their operators central sugar plan"ters and ',,,r1,., using the tax collected, Institute, Sugar Philippine ,,, illing share. The of which by operation the Refinery, Sngu" 1,,,.chlsed the Insular losses' in tremendous phiiippine resulted Institute Sugar ilr,, ,l.he three sugar centrals refused to pay their tax balances and ;r;;ked for the refund of the amounts paid on the ground that the tax l,r.ing in reality a special assessmeht; once it had been determined property owners paying the t lrrrt no benefit u..rr", or inures to the assessment were being said from proceeds the :|lrsossffrel}t, or that it had been levied' whom against those of prejudice ,r, is[pplied to the ceases' assessment said of payment the on insist t L,,n the authority to ITELD: The special assessment at bar is not so much an exercise 0l l he power of taxation nor the imposition of a special assessment, general welfare of the entire t i rt. the exercise of police power for the ,'()untry. It is, therlfore' an exercise of a sovereign power' which no The three sugar centrals are, 1'r ivate citizen may lawfuily resist. Ilrlrefore, Iiabl6 to pay the tax in question' ,
ItIUNJIENG v. PATSTONE, 42 PHIL' 818 ITACTS: Plaintiff was rlenied a building permit until he could of the city t)Iy a permit fee equal to one-half of the assessed value going to was he building of the arcade the by i,,,,d to be covered ,.orrstruct. Plaintiff assailed the legality of the fee and commenced
(
l,'11irl
,,1.t
action to contest the same.
HELD:Inimposingafeeequaltoone.halfoftheassessedvalue Municipal Board
he portion of the wal-k covered by the arcade, the oo
I,N
W 0IT I}ASIC'|AXA?ION
IN'I'III.] I'IIIT,II'I'INIIS
of Manila exceeded its powers. Nothing in the charter of the city shows an intention to confer power on the Municipal Board to impose a license tax for revenue anent the construction of buildings. The fee is a license tax, for a license fee may only be a sufficient amount to include the expense of issuing a license and the cost of necessary inspection. There are three classes of licenses which are recognized. They are as follows: (a) License for the regulation of useful occupations or businesses, (b) License for the regulation or restriction of non-useful occupations or businesses, and (c) Licenses for revenue only. Licenses for useful and non-useful occupations or businesses originate from the police power and the accepted rule is to the effect that the power that is conferred to regulate and to issue the license includes the right to fix the amount of the Iicense fee. License for non-useful occupations are also based on the police power and the exaction of a fee may be justified hy the power to license and regulate. However, in the fixing of the amount of the license fee, municipal corporations are allowed a wider latitude. Consequently, Iicense fees which are in the nature of privilege taxes have been upheld as in the case of the sale of liquors.
CITY COUNCIL OF CEBU CITY v. CUIZON, ETC., ET AL.,
L-28972, OCT. 3t, tg72
FACTS: The seven plaintiffs, majority members of the City Council of Cebu City, fiied an action against Carlos Cuizon, Mayor of Cebu City; Jesus Zabate, Acting Cebu City Treasurer; the PNB Co.; and, Tropical Commercial Co., praying inter alia that the contract of Feb. 5, 1966, between Cuizon, in behalf of the city, and Tropical Commercial Co. for the purchase of road construction equipment from the latter for P685,767.30 on a five-year deferred payment plan be annulled because the contract was entered into without the necessary authority and approval of the City Council. Furthermore, the City Treasurer had not certified to the City Mayor as required by Sec. 607 of the Revised Administrative Code that the funds had been appropriated for the purpose; and that the City Treasurer did not certify the availability of funds for the purpose. The lower court, however, ruled that on the basis of Art. l39T of the Civil Code, the plaintiffs lacked the legal capacity to sue since they are not the real parties in interest.
30
(i
ltlN
I,lltAl, I)ltl NUI I'l,US
lll,) l,l): '['he ruling of the lower court is erroneous since the ,,rrlrlrrinl. of the plaintiffs is not a personal suit but a representative ' rr r I lr.v t,he city councilors on behalf and for the benefit of the city of (','lrrr lrncl as taxpayers. 'l'lre lower court's interpretation that only the City Mayor is ,.rrrlrowored to sue for the city is untenable because here, the Mayor rr .rrltl be the last person to file such suit since he himself maintains llr,. lt'gality of his act. ,
'l'her
suit is like a derivative suit or a representative suit of ,lr, liholder on behalf of a corporation" (
a
t/\scoN, ET AL. v. ARROyO, ETC., ET AL., G.R. lIO. 7g3gg,
( )(
t'l'. 16, lggg
ILACTS: Following the 1986 EDSA Revolution, the Philippine (',rrrrrnission on Good Government (PCGG) sequestered the Lopez l;rrrrily's TV stations, Channels 2 and 4, and the Office of Media ,\ll'rrirs took over its operation. The Lopez farnily, through counsel, r 'rluested the Aquino Government for the return of TV Channels 2 ,rnrl 4. The PCGG approved the return of TV Channel 2 to the |,,pezes. As regards TV Channel 4, respondent executive secretary, l,r' rruthority of the President and representing the Government, ,.rrt.ered into an "Agreement to Arbitrate" with ABS-CBN, r,,lrresenLed by its president, Eugenio Lopez, Jr., pursuant to which ,rn arbitration committee rvas created" Petitioners, as taxpayers, filed a petition for certiorari and rrrjrrnction, seeking to annul and set aside said agreement.
HELD: As to whether or not petitioners have the legal
1rr:rsonality or standing to file the instant petition, the Court ruled
llrat in several cases, the right of a taxpayer to file an action ,ltrestioning the validity or constitutionaiity of a statute or law has lrcen recognized, on the theory that the expenditure of public funds lr.y an officer of the Government for the purpose of administering or rrnplementing an unconstitutional or invalid law, constitutes a rnisapplication of such funds. The present case, however, is not an action to question the r:onstitutionality or validity of a statute or law. It is an action to lnnul and. set aside the "Agreement to Arbritrate," which, as between Lhe parties, is contractual in character. Petitioners have not shown t.hat tirey have a legal interest in TV Station Channel 4 and that t,hey wiII be adversely affected if and when the said television station 31
(i
lN'ftl l' l'tlILlPPlNl'ls LAW 0!' IlASlo'fAxA'.ftoN
IiN I,lttAl, l'll.l N(ll
l'l,l')Ii'
rrrrl. r)rl rtntl other oil pr<-rducts which contint-red to be subject to the ' t",, I lr rl.or(' trl ridditional duty. Following suf5mission of a report by rlr, 'l'rr'ilf'oommission upon the cornpletion qg public hearings' per 1,r,r,,'tlrrrc set lbrth in the Tariff and Custorr\s Code, the President , , ,,,,.,1 l,l.O. 478, dated Aug. 23, 1991, which lQvied in addition to the ,, t,, r,. crrLioned 9% ad, ualorem additional dut .y and all other existing F0'95 P'er liter or P151'05 per ',,1 r',rlttratn duties, a special duty of F1 l,;rrr.l of imported crud'e oil and '00 Pet liter of imported oil
,
isreturnedtotheLoper,family..petitioners,therefore,havenolegal to file the present petition'
"tu"ai"g
t
AUDIT' PHILIPPINES, INC' v'-COMI\IISSION ON 1ee2 8, MAY Eill;- G.R. NO. s2585, on Audit (COA) directed FACTS:Respond'ent Commission (CPI) to remit to the OiI Price petitioner Cuft"f iftifiPilneg' Inc'. collection of the additional tax on St"abiiizatior f'o.ra iOfSpl its 1956' as weII as unremitted petroleum p.oatttl-' put't'uu"t to P'D' the years 1986, tr987 and 1 988' c.ilections uf tfr" ufrou, tax covering arJvising it that all its claims for with intere.tt a"il"charges' and shall be held in abeyance pending reirnbursement iiomlh* opsr to COI further directed petitioner oil cornpany CA1,Tp;X
sui:h
remittrrr"*
thc taxes coilected against outstarrding desisi, from further'-oiisetting
periods' claims for 1989 snd sxbsequent of-the eventuai decision of ttre COA I1s motion f's1 lsssnsideration CPI imputes that respourient on fhe matter ;";*g been denied' aliu' in.preventing the former from ''igi't ter commissio., u"lal'i" t? "lf:.:l its remittances against lt's exercising tf'" the OFSIr' reirnbu rsement vis-A-ris or not the amounts due tc tlie ItttLD: On the iseue of whetheragainst the latter's outstanding lr* offset clpsts r"om petiiio"rur*uv it is settled that a taxpayer rnay not offsel claims frr"uii"f,'rnd, he may have against the G-overnment' taxes due fro*'"tui*t that of compensation because the Governmertt Tsxes cannot fr* ii* ouUj"ct creditors and debtors of each and tlre tu"puV*' u'e not mutuaily iortute" is not s^uch a debt, demand' cont'ract or other a,d u "t.i* set off' :.,,ig*""t as is allowed to be envisioned as 'lhe Court furthel ruled that taxation is no longer of the existence the revenue.to support a measllre merely t0raise as such purpose for a reguiatory Governrnent. fui"r,"uy be levied stabilization of a
to provide
*"u"'"f" ihe reh^abiiitation
and
threatenedindustryruhichisaffectedwithpublicinterest'aconcern of the State to address' which is within the police power
E'f AL'', G"Id' GARCIA v. EXEOUTM SECRETARY',
hro. rorzzS, JULYS' 1992 on Aug' 15' 1991 bv [)r'csident FACTS: Ii.O 4i5 was issued Aqtrino,"a,.ingLt,i.rrrbeof'ad.l.itionaldutyonallinrptlr'l,r:tlrrrticles 9'% t'tt |o/u utf r'tulorenr, tlxct'pl' itr t:rtsers of frorn the or"ri,,X.f r'irrlposed
rr
r r r
1,r,,rlrtt't,.
petition for certiorari, prohibition and mandamus, petitioner ,,', ,,rtlcd the validity of E'O' 475 and E'O' 478 for being violative of li, , ll4, Art. VI of the Constitution' It was contended that since , rr I 1, ( llyylglsss has the authority to enact rev€ nus bills, the President rr'r 1' ttt)t u.ar*" such power by issuing the afcJrementioned executive ,,r rl('r's which are in the nature of revenue-EQnerating measures' lrr
rr
,
ll IILD: While the enactment of appropriQtion, revenue and tariff l,rll:r is within the province of the Legislat ive, it does not follow' lrowtlv€r, that E.O.475 and E.O.478 ma), not be issued by the t,r,,sident, because under sec. 28(2) of Article vI of the constitution, tlr.rc is explicit permission to Congress to authorize the President ,;rrbject to such limitations and restrictiQns as [congress] may ,,,,g,cise,'to fix*within specific limits" "tariFf rates x x x and other ,lrrt ies or imposts x x x'" The relevant congressional statute is t-he Tariff and Customs ( torle of the Philippines, particuiarly Secs- 104 and 401, being the p.rtinent provisiqns. These are the provisions which the President ,'xlrlicitly invoked in promulgating E'O' 475 and E'O' 478'
OSMEilIA V. ORBOS, ETC., ET AL.' G'Et . NO. 99886' MAR' 31' I
993
FACTS: Under P.D. 1956, the Oil Price Stabilization Fund (oPSF) was created as a special fund for reimbursing oil companies 1or cost increases in crude oil and imporrted petroleum products resulting from exchange rate adjustments and from increases in world market prices of crude oil. The OPSI' was reclassified into a trust liability account by virtue of E'O' lo24 in 1985 and was ordered released to the Ministry (now, Department) of Energy' Said executive order also authorized the investment of tihe fund in government securities, with earnings therefrom accruir:\g to the fund. E.O. 137, issued on Feb, 27,1987 , amended P.D. 1956 tay expanding the grounds for reimbursement by oil companies for po ssible cost underrecovery 33
LAW Ol,' llASl(;'t'AXA'l'lON IN't'll
I,t
I,illl,lt,l)lNI,tS
(i
l,)N
l,lltAl, l'ltl
NC
I
t'l,lts
due to reduction of dornestic prices of petroleum produced, as determined by the Ministry (now, Department) of Finance. Petitioner avers that the creation of the trust fund violates Sec. 29(3), Art. VI of the Constitution. He argues that the monies collected pursuant to P.D. 1956 should be treated as a speciar fund, not as a trust account or trust fund and should be used onry for the special purpose or objective for which it was created.
r:i t'rrt,it,lcd t,<-r lre reimbursed by the BIR for that part of the l, r r,, r. ;i l r rir:o ol' Nl'}C which verifiably representQ the tax already paid
HELD: Likening the OPSF to the sugar stabilization fund and citing the ruling in Gaston, et al. u. Republic Planters Bank, et al. (G.R. No. 77L94, Mar. 15, 1988) which explained the nature and upheld the validity of the sugar stabilization fee, the Court held
rir r
that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the state. Moreover, that the OPSF is a special fund is plain from the special treatment given to it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the coA. The court is satisfied that these measures comply with the constitutional description of a "special fund."
irl'('
l,. tlr. ,il
lr)\'4, r
t,l'll AL. v. PRESIDENTIAL COMMISSION ON GOOD ioV I,ItNMENT (PCGG), ET AL., G.R. NO. 96541, AUG. 24, 1993
/, l(l'l'^S; Petitioners, luminaries in the local art scene and as t,, \,(,r's, filed a petition for prohibition and mandamus seeking to !,r 1 r n t lrc PCGG from proceeding with the auction sale by Christie's ,,t llr,,"v York, per Consignment Agreement, of the OId Masters l',irrrtnrgs as well as 18th and 19th century silverware seized from l\lirl;r.irrrang and Metropolitan Museum of Manila and placed under ,
tlr,., rr:;tocly of the Central Bank. They alleged that said artworks ,., r, lrrst.orical relics having cultural significance whose disposal ,,, , 1,r'ohibited by law. Respondents defended the Consignment \1,r.r'111g111 and their authority to sign the same averring that said I',urrlrngs and antique silverware were part of the ill'gotten Marcos '- , ,r lllr ;rnd did not fall within the classification of protected cultural 1,r,,1r.r'tics nor specifically qualified as part of the Filipino cultural 11, r
MACEDA v. MACARAIG, JR., ETC., ET AL., G.R. NO. 88291, JUNE 8, 1993 (RESOLUTION) FACTS: Petitioner moves for reconsideration of the decision in the instant case promulgated on May 81, 19g1 sustaining the exemption of private respondent National Power Corporation (NpC) from all forms of taxation.
HELD: A chronological review of the NPC laws will show that has been the lawmaker's intention that the NPC was to be completely exempt from aII forms of taxes - direct and indirect. On the issue as to who pays for the taxes due the Government for the sale of bunker fuel oil to the NPC, the Court, quoting DOJ Opinion No. 106, series of 1954, ruled that oil companies which supply bunker fuel oil to the NPC have to pay the taxes imposed upon said bunker fuel oil sold to the NPC. By the very nature of indirect taxation, the economic burden of such taxation is expected. to be passed on through the channels of commerce to the user or consumer cf the goods sold. Beca,u,se, however, the NPC has been exempted from both direct and indirect taxation, the NPC must be held exempted from absorbing the economic burden of indirect taxation. If the NPC purchases such oil from the oil companies, the
it
34
conrpany-vendor to the BIR.
rltr11c.
llllt,D: The rule is settled that no question involving the rrtionality and validity of a law or governmental act may be by the court unless there is compliance with the l, 1,irl lcquisites for judicial inquiry. Petitioners, having failed to ,lr,,rv Llrat they are legal owners of the artwork or that the valued i.,,,,'r; have become publicly owned, do not possess any clear legal rrl,lrt lo question the alleged unauthorized disposition thereof. l.lr,it,her can this petition be allowed as a taxpayer's suit. Not , , , r 1, rrction filed by a taxpayer can qualify to challenge the legality
,,,rr,t
rl
1,,,rr rl rrnd decided
,,llrr:iul acts done by the Government. A taxpayer's suit can prosper rr I y rl t,[-re governmental acts being questioned involve disbursement , ,l 1, rr lr lic funds upon the theory that the expenditure of public funds ,,1 ,,
officer of the State for the purpose of administering an rs[itutional act constitutes a misapplication of such funds, which r,r:r v l)(' enjoined at the request of a taxpayer. Obviously, petitioners ,, r ,' not, challenging any expenditure involving public funds but the ,lr''p.sition of what they allege to be public properties. It is worthy t', not,e that petitioners admit that the paintings and antique ,rrl'r,r'w&r€ were acquired from private sources and not with public lr1' ;ur ,r
rr,
,r
r
Irntl('y.
35
LAW
OIT BASIC
TAXATION IN THE PHILIPPINES
GIINERAL PRINOIPLF]S
COMMISSIONER OF CUSTOMS v. MANILA STAR FERRY, INC., ET AL., G.R. NOS. 31776-78, OCT. 21, 1993 FACTS: Manila Star Ferry, Inc., United Navigation and Transportation Corporation and Chiat Lee Navigation are the owners of the tugboat 'Orestes,' the barge Iighter UN-L-106, and the vessel S/S Argo. On June 12, 1966, the S/S Argo, the Orestes and UN-L-106, along with two wooden bancas of unknown ownership were apprehended for smuggling. They were caught in the act of unloading imported cigarettes, clothing materials and apparel and piastic bags along the Manila Bay, all of which were not manifested and declared for discharge by said vessel. Seizure and forfeiture proceedings against S/S Argo and its cargo and the other watercrafts were initiated for violation of Sec. 2580(a), (b) and (c) of the Tariff and Customs Code, along with appropriate criminal charges. In a decision by the Collector of Customs, as affirmed by the Customs Commissioner, the vessels and watercrafts were declared forfeited in favor of the Government pursuant to Sec. 2530(a) and (b). The CTA, acting on the petition for review, substantially modified said decision by ordering private respondents to instead pay fines.
HELD: Sec. 2530(a) in unmistakable terms provides that
a
vessel engaged in smuggling "in a port of entry" cannot be forfeited.
This is the clear and plain meaning of the law. It is not within the province of the Court to inquire into the wisdom of the law, for indeed, it is bound by the words of the statute. Neither can words be put in the mouths of the lawmakers. A uerba legis non est recedendum. Nevertheless, although the vessel cannot be forfeited, it is subject to a fine of not more than F10,000 for failure to supply the requisite manifest ofthe unloaded cargo under Sec. 2521 of the Code.
SAN CARLOS MILLING CO., INC. v. COMMISSIONER OF INTERNAL REVENUE, ETAL., G.R. NO. 103379, NOV.23,1993 FACTS: Petitioner corporation had a totai income tax overpayment of P781,393 for taxable year 1982, reflected as creditable income tax in its annual final adjustment return. Said amount was not applied against its 1983 tax liabilities because it sustained a net loss for that year and it still had a creditable income tax of ?4,47A. Thus, its final adjustment income tax return for taxable year 1983 reflected the amount ofF781,393 carried over as 36
credit and F4,470 as creditable income tax. Iretitioner signified its intention to apply the total creditable rrrrruunt of P785,863 against its 1984 tax liabilities pursuant to Firt:. 86 of the Tax Code (now, Sec. 76, 1997 NIRC), accompanied by rrrr trlternative request for a refund or tax credit' Respondent r,ornmissioner disailowed the proffered automatic credit scheme, but l,r*rrted the request as an ordinary claim for tax refund or credit, rrrrrl pursuant to Sec. 292 (now, Sec' 229, 1997 NIRC) in relation to l,ir,c. 295 (now, Sec, 204, 1997 NIRC) of the Tax Code, subjected the rin rne to verification/investigation. On review, the CTA heid that prior investigation by and authority l'rom the CIR were necessary before a taxpayer can avail of a tax rt,l'und or credit. The Court of Appeals, upholding the ruling of the I,rrx court, dismissed the appeal thereto'
rr t,rrx
On the main issue of whether or not prior authority from Internal Revenue is necessary before a corporate lrrxpayer can credit excess estimated quarterly income taxes paid
HELD:
I,lro Commissioner of
rrllainst the estimated quarterly income tax iiabilities for the rrrrt:r:eeding taxable year, under Sec. 86 of the Tax Code (now, ,\r'r:. 76, 1997 NIRC). respondent court correctly held that the choice nl'u corporate taxpayer for an automatic tax credit does not lpso f trcto confer on it the right to immediately avail of the same and r,rrrphasized the need for an investigation to ascertain the correctness ol'Lhe corporate returns and the amount sought to be credited.
Prior approval by the Commissioner of Internal Revenue of the credit would appear to be the most reasonable interpretation to lrc given to said section. An opportunity must be given the internal rovenue branch of the Government to investigate and confirm the vcracity of the claims of the taxpayer. The absolute freedom that pctitioner seeks to automatically credit tax payments against tax lirrbilities for a succeeding taxable year, can easily give rise to r:onfusion and abuse, depriving the Government of authority and r:ontrol over the manner by which the taxpayers credit and offset l,heir tax iiabilities, not to mention the resultant loss of revenue to t,he Government under such a scheme. l,rrx
I'ATALINGHUG v. COURT OF APPEALS, ET AL.' G.R. NO, 104786, JAN. 27,1994
FACTS: The Sangguniang Panlungsod of Davao City enacted ()rdinance No. 363 in 1982, otherwise known as the Expanded Zoning Ordinance of Davao City, Sec. 8 of which provided that C-2 districts 37
LAW OF BASIC TAXATION IN THN PHILIPPINES
GIINERAL PRINCIPLES
shall be for predominantly commercial and industrial use. Petitioner applied for and was granted a building permit for the construction of a funeral parlor named Metropolitan Funeral Parlor at Cabaguio Avenue, Agdao, Davao City. Private respondents who are residents of Barangay Agdao, complained that since the construction of said funeral parlor was within the b0-meter radius from the Iglesia Ni cristo (INC) and several residential structures, it violated the restrictions under Sec. 8 of said city ordinance. The Iower court dismissed the complaint on the ground that there was no violation of the regulatory provision of the zoning ordinance. On appeal, the Court of Appeals reversed the lower court's decision by annulling petitioner's buiiding permit. It ruled that even if the buildings owned by the INC and respondent Cribillo were beyond the 5O-meter residential radius, the funeral parlor was within the 50-meter radius from the building of one Wilfred Tepoot. Overruling the lower court's determination that said building was commercial, the appellate court held that although Tepoot's building was used by a lessee for a laundry business, nevertheless, per tax declaration, it was a residential lot.
petroleum products withdrawn from the refinery. In addition, rr surcharge of 25oh was imposed by the BIR for Mobil's failure to i.e., within lrrry tho additional ad, ualorem taxes in a timely manner, resolutions' two the of I 5 days from the respective dates while Mobil agreed to pay the additional a.d ualorem taxes, it, Irowever, protesred the assessment of the 25% surcharge on the grcrund that at the time the excise tax or ad ualorem tax on the yet in existence ltroducts were due, the additional tax base was not paid. was, therefore, There be not tax could irnd hence the additional was sought 25% surcharge the which for delay rrs argued by Mobil, no t,o be collected. In rejecting the protest of Mobil, the commissioner of Internal Itovenue stated that the dates of the two BOE (now, ERB) resolutions wcre,,by inference the date of removal of the products from the place of'production mentioned in Sec. 110" of the Tax Code (now, Sec' 130, teeT NIRC} After the BIR Commissioner was sustained by the cTA, Mobil wcnt to the court of Appeals which declared that Mobil was not guilty of delay in the payment of the adjusted excise tax for the reason lhat there was no period specified in the resolutions for the payment of'said taxes. According to the court of Appeals, one cannot incur in tlr.:lay when there is no period fixed for payment'
HELD: The appellate court's decision is reversed and the lower court's ruling that petitioner did not violate the city zoning ordinance is reinstated. The reversal by the Court of Appeals of the trial court's decision was based on Tepoot's building being declared for taxation purposes as residential. The court held that a tax declaration is not conclusive of the nature of the property for zoning purposes. A property may have been declared by its owner as residential for real estate taxation purposes but it may well be within a commercial zone. A discrepancy
may thus exist in the determination of the nature of property for real estate taxation purposes vis-d-vis the determination of the
property for zoning purposes.
COMMISSIONER OF INTEBNAL REVENUE v. MOBIL PHILIPPINES,INC., ET AL., G.R. NO. 704920,ApR. 28,1994 FACTS: The Energy Regulatory Board (ERB) issued Resolution No. 87-02, dated Feb. 11, 1987 and Resolution No. 87-03, dated Mar. 16, 1987, respectively increasing by an average of 30.2 and 54.7 centavos per liter, retroactive to Jan. 1, 1987 and Mar. I, 1g87,
t,ux on
HELD: In reversing the decision of the Court of Appeals, the supreme court declared that while it is literally true that the
rrtljusted tax base, or the wholesale posted price as increased by or rrs a result of the operation of the two resolutions did not exist 15 rluys after physical removal of the product from the refinery, however, il' t,hat contention were taken literally and seriously, the additional rrd ualorem taxes on the previously withdrawn petroleum products would be payable only when it would please Mobil to pay such taxes' Such a r"rrrit is absurd and certainly repugnant to public policy, for (lre additio rtal ad. ualorem taxes were clearly due on the additional vrrlue undeniably accruing to Mobil's benefit in respect of previously w ithdrawn prod.ucts but not yet disposed of by the time the increase in cost recovery of oil companies was arithorized by the ERB rcsolutions.
the cost recovery of oil companies on the various petroleum products refined and marketed by them locally. As a result of theee reuolutions, BIR assessed Mobil Philippines, Inc. (Mobil) a deficiency ad. ualorem
MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC. V. DEPARTMENT OF FINANCE SECRETARY, G.R. NO. 1"08524, NOV. 10, 1994 FACTS: Petitioner coconut traders association is engaged in
38
39
LAW OT BASIC TAXATION IN THE PHILIPPINES
buying and_ selling copra in Misamis oriental. petitioner alreges that under sec. 108(b) of the Tax code (now, sec. 109[cJ, lggr NIRC), copra was classified as an agricultural food product, and, therefore, exempt from value-added tax (vAT) at alr rtugu. of production or distribution. on June 11, 1991, Revenue Memorand.um circurar No. 47-g1 was issued, classifying copra as an agriculturar non-food product under Sec. 108(a) (now, Sec. l\g[aJ, iSSf NmCl and declaring it exempt from vAT only if the sale is made by the primary prod.ucer. Petitioner challenges such reclassification of copra as an agricultural non-food product because it has the effect of denying to petitioner the exemption it previously enjoyed when *r. classified as an agricuitural food product. "opr"
HELD: In inte_rpreting Sec. 1QB(a) and (b), NIRC (now, sec. 109[a] and [cJ, r99z NIRC). the commission"" of Internal Revenue gave it a strict construction consistent with the ruie that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the State. Moreover, as the government agency charged with the enforcement of the law, the opinion of the commissioier of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight. The ruling was made by the commissioner of Internal Revenue in the exercise of his po*u, und.er s".. z+s or the NIBC (how, secs. 244 a*d, z4i, rggr tunq to make rurings or opinions in connection with the implementation of the provisions of internal revenue laws, including rulings on the classification of articles for sales tax and similar purposes.
GENEBAL PRINCIPLES
tllrrrund for payment and business taxes with F5,000 compromise lrt'nultf was served on ACMDC. ACMDC protested both assessments, but the same was denied, Irt'nce it filed petitions for review before the Court of Tax Appeals ((1'l'A). On May 31, 1991, the tax court rendered a consolidated rf r'
ACMDC,
stiil not satisfied with the decision of the Court of
coMMIssIoNER oF INTEBNAL REVENUE v. couRT oF APPEALS, ET AL., G.R. NO. t041Et, and ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION v. CoURT oF APPEALS, nr ei., c.n. NO. 105563, jointly decided on MAR. 10, 1996
Appeals reducing its tax liability to F906,124.49 by deleting the 25% surcharge on silvdr, gold and pyrite, similarly filed a petition before the Supreme Court (G.R. No. 105563) alleging that it should not be liabie for any deficiency tax assessment for 1975 and 1976.
FACTS: Petitioner Atras consolidated Mining and Development corporation (ACMDC) is a domestic corporation which owns and operates a mining concession in Toledo City, Cebu. on Apr. 9, 1980, the commissioner of Internal Revenue, acting on the report of BIR examiners, served on ACMDC an assessment notice and demand for payment of F1Z,gg1,0T0.b1 representing deficiency ad ualorem percentage and fixed taxes prus increments for the taxable year 192b. Likewlse, another assessment notice with
HELD: In G.R. No. 104151, the Court held that the provisions ofthen Secs. 243 ar,d246 ofthe Tax Code provide that the assessment shail be based, not upon the cost of production or extraction of said minerals or mineral products, but on the price which the samebefore or without undergoing a process of manufacture-would command in the ordinary course of business. In the instant case, the allowance by the tax court of smelting and refining charges as deductions is not contrary to the above-
40
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fl I,AW OF BASIC TAXATION IN THE PHILIPPINES
GTiNERAL PRINCIPLDS
mentioned provisions of the Tax Code which ostensibly prohibit any form of deduction except freight and insurance charges. A review of the records showed that it was the London Metal Exchange price on copper wire bar which was used as tax base by ACMDC for purposes of the 2o/o ad ualorem tax on copper concentrates since there was no available market price quotation in the commodity exchange or markets of the world for copper concentrates nor was there any market quotation locally obtainable. Hence, the charges for smelting and refining lyere assessed not on the basis of the price of the copper extracted at the mine site which is prohibited by law, but on the basis of the actual market value of the manufactured copper which in this case is the price quoted for copper wire bar by the London Metal Exchange. In several cases, it has been held that the ad ualorem tax is to be cornputed on the basis of the market value of the mineral in its condition at the time of such removal and before it undergoes a chemical change through manufacturing process, as distinguished from a purely physical process which does not necessarily involve the change or transformation of the raw material into a composite distinct product. Therefore, the imposable od uqlorem tax should be based on the selling price of the quarried rninerals, which is its actual market value, and not on the price of the manufactured product. If the market value chosen for reckoning is the value of the manufactured or finished product, as in the case at bar, then all expenses of processing or manufacturing should be deducted in order to approximate as closely as possible the actual market value of the raw mineral at the mine site. As a matter of practice and principle, the Supreme Court will not set aside the conclusion reached by an agency such as the CTA, which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part. In G.R. No. 105563, the Court ruled that under Sec. 248 of the then Tax Code, the payment of ad ualorem tax shall be made upon removal of the mineral products from the mine site or if payment cannot be made, by filing a bond in the form and amount to be approved by the Commissioner conditioned upon the payment of said tax. In the instant case, the records show that the payment af. od ualorem tax on gold, silver and pyrite was belatedly made. Bad faith
is not essential for the imposition of the 25% surcharge for Iate justification given by ACMDC lrayment of the ad. ualorenr. tax. The pyrite on which t]ile ad ualorem and i,t ut tfru quantity of gold, silver it goes through some after l,ax is based can only be determined of its liability to pay ACMDC relieve processing is not sufficient to payment. l,he 25% surcharge for }ate The law requiring the payment of the 25% surcharge in case the q,d, ualorem tax is not seasonably paid is mandatory' It provides a plan which works out automatically. The cornmissioner of Internal il*,r".rru is not vested with any authority to waive or dispense with
42
bhe collection thereof.
As for the manufacturer's tax imposed under then Sec. 186 of the Tax code and based on the legal concept of "engaging in business,,'ACMDC cannot be held liable therefor. A manufacturer, in order to be subjected to pay the percentage tax under said section, must be "engaged" in the sale, barter or exchange of personal property. It cannot be legally asserted, for purposes ofthis particular u"r"".*"rt only, that ACMDC was engaged in the business of selling grinding steel LaIIs on the basis ofthe isolated transaction entered into by lt i., f gZS. There is no showing that said tralsaction was underiaken by ACMDC with a view to gaining profit therefrom and with the intent of carrying on a business therein. The sale v/as more of an accommodation to the other mjling companies. weII settled is the rule that anything done as a mere incident to, or as a necessary consequen"" oi, the principal business is not ordinarily an independent business in itseif. ACMDC was not a manufacturer subject to percentage tax imposed under Sec' 186' The same conclusion, however, cannot be made with respect to the contractor's tax being imposed on ACMDC under the former sec. 191 of the Tax Code. It cannot validly claim that the leasing out of its personal properties was merely an isolated transaction. Its book of accounts .ho*. that several distinct payments were made for the use of its personal properties such as its plane, motor boat and dump truck. Considering that there was a series of transactions involved, plus the fact that there was an apparent and protracted intention io profit from such activities, it can be safely concluded that ACMDCwas habitually engaged in the leasing out of its plane, motor boat and dump truck, and is perforce subject to the contractor's tax. Assessmen ts are prima facie presumed correct and made in good faith. It is the taxpayer and not the Bureau of Internal Revenue who has the duty of proving otherwise' It is an elementary rule that 43
LAW Ol,' llASl()'l'Axn'l'lON
IN't'ltl,l PHILIt,PINITS
in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. All presumptions are in favor of tax assessments. Verily, failure to present proof of error in the assessment wiII justify judicial affirmance of said assessment.
Tax statutes are to receive a reasonable construction with a view
to carrying out their purpose and intent. They should not be construed as to permit the taxpayer to easily evade the payment of the tax.
PHILIPPINE AIRLINES, INC. v. SECRETARY OF FINANCE, ET AL., G.R. NO. 115852, OCT. 30, 1995, and companion cases (RESOLUTTON) HELD: Reiterating its earlier decision declaring the constitutionality of R.A. 7716, otherwise known as the Expanded Value-Added Tax Law, the Court held, inter alia, that the enactment of R.A. 7716 as a revenue tax measure conforms with the procedure prescribed by Sec. 24, Art. Vl of the Constitution. While Sec. 24, Art. VI provides that all appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of Iocal application, and private bills must "originate exclusively in the House of Representatives," it also adds, "but the Senate may propose or concur with amendments." In the exercise of this power, the Senate may propose an entirely new bill as a substitute measure. S. No. 1630, as a substitute measure, is therefore as much an amendment of H. No. 11197 as any which the Senate could have made. As regards the requirement in Sec. 26(2), Art. VI of the Constitution that the title of the law shall contain the subject of the bill, by stating that R.A.7716 seeks to "[Restructure] The ValueAdded Tax (VAT) System [By] Widening Its Tax Base and Enhancing Its Administration, and for These Purposes Amending and Repealing the Relevant Provisions of the National Internal Revenue Code, as
Amended and for Other Purposes," Congress thereby clearly expresses its intention to aurend any provision of the NIRC which stands in the way of accomplishing the purpose of the iaw. As a general proposition, the press is not exempt from the taxing power of the State and that what the constitutional guarantee of free press prohibits are laws which single out the press or ttrrget a group belonging to tire press for speciai treatment or which in any way discriminate against the press on the basis of the contctrt, r-r{i the publication, and R.A. 7'i16 is not one of these. 44
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I,lltAL P tilN() l l,l,lrs
Wrth respect to the contention that by removing the exemptions ,l't.he press from the VAT while maintaining those granted to others rrrirkes the law discriminatory, it was held that since the law granted ilrc press a privilege, the law could take back the privilege anytime w it,hout offense to the Constitution. The reason is simple: by granting ,.xcmptions, the State does not forever waive the exercise of its :rovereign prerogative. In withdrawing the exemption, the Iaw rrrorely subjects the press to the same tax burden to which other lrrrsinesses have long been subject. The VAT is not a Iicense tax. It is not a tax on the exercise of a lrrivilege, much less a constitutional right. It is imposed on the sale, lr;rrter, Iease or exchange of goods or properties or the sale or ,';rchange of services and the lease of properties purely for revenue t)urposes. To subject the press to its payment is not to burden the lxercise of its right any more than to make the press pay income tax or subject it to general regulation is not to violate its freedom under l he Constitution.
I'HILEX MINING CORPORATION v. COMMISSIONER OF INTERNAL REVENUE, ETAL., G.R. NO. 125704,AUG.28, 1998 FACTS: The BIR sent a letter to petitioner Philex Mining Corporation (Philex) on Aug. 5, 1992 asking the latter to settle its tax liabilities for the second, third and fourth quarters of 1991, and of the first and second quarters of 1992, totaling ?123,821,982.52. l'}hilex protested the demand for payment of tax liabilities stating t,hat it has a pending VAT input credit/refund for taxes paid for the .years 1989 to 1991, amounting to P119,977,037.02 plus interest, which should be applied against its tax liabilities, citing as authority t,he ruling rn Collector of Internal Reuenue u. Itogon-Suyoc Mines, Inc., et al. On Sept. 7,1992, BIR, disregarded Philex's position and declared that no compensation can take place and reiterated its demand for payment of tax liabilities plus interest within 30 days from receipt. In view thereof, Philex raised the issue before the CTA on Nov. 6, 1992. In the meantime, the BIR issued a tax credit forP13,144,313.88 which, as applied to Philex's tax liabilities of ?123,821,982.52, Iowered petitioner's tax obligation to ?110,677,688.52. The CTA ordered Philex to pay the remaining balance of its tax obligation plus interest, holding that there can be no legal compensation between a iiquidated debt to the Government and an unliquidated claim ofpetitioner; besides, taxes cannot be subject to 45
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LAW Ol.' llAslLl't'AXA'ftON lN 1'll t'l l'Flll,l l)l'lN!)S
offset or compensation. The Court of Appeals affirmed the decision of the CTA, and denied petitioner's motion for reconsideration. A few days after such denial, Philex obtained its VAT input credit/refund for 1989 to 1991, 1992 and 1994. Consequently, Philex insisted that ipso jure there can now be an offset between said input credit/refund and its excise tax liabilities since both have already
become due, demandable and fully liquidated, and legaI compensation can properly take place.
HELD: The Supreme Court found no merit in petitioner's contention. Taxes cannot be subject to compensation for the simple reason that the Government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and a debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. It has been categorically and repeatedly held that taxes cannot be subject to set-off or compensation (Francia u. Intermediqte Appellate Court, et al., G..R. No. 67649, June 26, 1988; Coltex Philippines, Inc. u. Commission oru Audit, et al., G.R. No. 92585' May 8,1992). The ruling in Commissioner of Internal Reueruue u. Itogon,'Suyoc Mines, Inc., et al. (L-25299, July 29, 1969) no longer has any support in statutory law. The premise of the ruling in the aforementioned case was anchored on Sec. 51(d) ofthe National Internal Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the ltogon,'Suyoc pronouncement was based was omitted. Accordingly, the doctrine enunciated in ltogon-Suyoc cannot be invoked by Philex. A distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the defense that it stiil has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the Government or that the collection of the tax is contingent on the result of the lawsuit it filed against the Government.
I,lN I,)Rn
L PItl N(ll
l'l,lrs
AuISCO INSURANCE CORPORATION, ET AL. v. COURT OF ,\t,t,lrALS, ET AL., G.R. NO. 112675, JAN. 25, 1999
ttAcTS: Petitioners comprise 41 domestic non-life insurance
,
or-l)or6tions. Upon issuance by them of various machinery insurance
lrolit:ics, petitioners entered into reinsurance treaties with Nlrrnchener Ruckversicherungs'Gesselschaft (Munich), a ,,,,rr resident foreign insurance corporation on Aug. 1, 1965' The nlirlrirnce treaties required petitioners to form a pool, as one was ,',,',rrlingly formed on the same day. 'l'he pool of machinery insurers submitted on Apr' 14, L976 a lrrr;rrrcial statement and an "Information Return of Organization l,lxr.rrrpt from Income Tax" for 1975 on the basis of which the ('ollccior of Internal Revenue assessed deficiency corporate taxes ,,rrtl withholding taxes at source and on dividends paid to Munich
petitioners. The assessment was protested through the pool's ,rutlitor, SGV and Co. On Jan. 27, 1986, the Commissioner denied the protest and ,,r'tlcred. petitioners, assessed as "Pool of Machinery Insurers"'to pay ,1,.l'iciency income tax, interest and withholding taxThe court of Appeals ruled that (1) the pool of machinery insurers \ry1rs a partnership taxable as a corporation and that the latter's ,.ollection of premiums on behalf of its members, the ceding ,'ornpanies, was taxable income; and, (2) prescription does not bar -BIR rlrt: from collecting taxes due because the taxpayer cannot be located. at the address given in the income tax return filed. l'ctitioners contend otherwise. rr
rrrl to
HELD: The petition has no merit. The supreme court sustained l,he ruling of the appellate court that the pool is taxable as a r.orporation, and that the Government's right to assess and collect t,he taxes had not prescribed. on the issue of whether or not the pool or clearing house is I,axable as a corporation, the supreme court ruled that ineludibly the Philippine legislature, per Sec. 24, NIRC as worded in 1975, included in the concept of corporations those entities that resembled t,hem such as unregistered partnerships and associations. The NIRC's inclusion of such entities in the tax on corporations is made even clearer by the Tax Reform Act of 1997 which amended the Tax Code, the pertinent provisions being Secs. 22 and 27(A), 1997 NIRC' The court, citing Euangelista et al. u. collector of Internal Reuenue, et al. (102 Phil. 140), heid that then Sec' 24 covered
46
47
l,nw olr llnsl(l'l'AXA',l'toN lN 1'illl pHlLilrplNlrs unregistered partnerships and even associations or joint accounts which had no legal personalities apart from their individual members.
In the instant case, prescinding from Art. 1T6z of the civil code, which defines a contract of partnership, the court ruled that the ceding companies entered irrto a pool agreement or an association that would handle all insurance businesses covered und.er their quota-share reinsurance and surplus reinsurance treaties with Munich, considering the following indicia: (1) the poor has a common fund that pays for its administration and operating expenses; (2) the pool functions through an executive board composed of representatives from the ceding companies; and (3) while the pool is not a reinsurance and does not issue i.nsurance policies, its work is indispensable, beneficial and useful to the business of tire ceding companies.
As to whether or not remittances to the pool are dividends subject to tax and would constitute double taxation for taxing the same premium income twice, the court ruled that the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends received. by said companies. clearly, there is no double taxation here. The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains.,,.rp"ou!., and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right. petitioners have failed to discharge this burden of proof. The sections of the 1g77 NIRC cited are inapplicable because these were not yet in effect when the income was earned and when the subject information return for the year ending 1975 was filed. The exemption granted to the reinsurance companies under sec. 255 of the 197b version of the NIRC cannot be applied to the instant case because the pool is a taxabre entity distirrct from the ceding companies and, therefore, the latter cannot individually claim the income tax paid by the former as its own. Sec. 2a@)(1) (now, sec. [28J[1J, 1997 NIRC) pertains to tax on foreign corporations, hence it cannot be claimed by the ceding corporations. Neither ca, Munich be granted exemption solely on the basis of this provision of the Tax code because it specifically taxes dividends, the type of remit,tances forwarded to it by the pool. whiie not a signatory o[' 1,he pool 48
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IIITAL PII,INC]IPI,ES
,\1irct'rnent, Munich is apparently an associate of the companies 1,rn-suant to the reinsurance treaties, which required the formation ,,1 llrt'said pool. Munich cannot be considered tax exempt under the li l' Wcst Germany Tax Treaty because the assessment for corporate nr('()rne tax was made when the treaty was not yet in effect. l,'inally, on whether or not the Government's right to assess and ,,,llcct the subject taxes had prescribed, the Court ruled that the 1,r'r'ricriptive period was tolied under Sec. 333, NIRC (now, Sec. 223, t !97 NIRC) because "the taxpayer cannot be located at the address lirvt'n in the information return filed and for which reason there rlelay in the sending the assessment." The law states that said 'r':rs 1,r'r'iod will be suspended only if the taxpayer informs the (lr)nrmissioner of any change of address. Indeed, whether the ( i,rvernment's right to collect and assess the tax has prescribed rrrvolves facts which have been ruled upon by the lower courts. In tlrr, :rbsence of a clear showing of palpable error or grave abuse of ,lrscretion, as in this case, the Court rnust not overturn factual I rnrlings of the CTA or the Court of Appeals.
EXERCISES 1. (a) What is taxation? What are the elements of a tax? l,)xplain.
(b) Do tax laws operate beyond the jurisdictional iimits of a country? Explain. (c) Is not the principle of territoriality or situs vioiated whenever the Philippine Government taxes the income of rron-resident citizens abroad? Explaiu ycur answer. 2. (a) Distinguish between tax and iicense fee. (b) Is the taxing power inherent in the State as well as in the local governments? Explain. 3. The VAT (value-added tax) law authorizes the refund or tax credit of "input taxes" passed on to the manufacturer-seller of the t'inished products on which the inputs subject to input taxes had been used. The refund or tax credit is authorized only if the rnanufacture-seller exports the finished products and is registered with the BIR, as a"zere rated exporter." That, is to say, he is exempt lrom VAI and also entitled to refund or credit of i.npr,rL taxes. On the other hand, a rnanufacturer-seller who exports his product but is not VAT-registered is only exempt from VAT but is not entitled to refund or credit of input taxes. (a) Is this not contrar], to tlie equal .,i
tl
l,Aw 0lf
IJn
stC l'Ax^'t,toN lN ,t't-lti l,t-ilLIt,l,tNlrs
protection clause in the Constitution? (b) What non-revenue aspect of taxation can you perceive in the problem above? Explain your answer.
4. The withholding tax law requires the withholding agent to withhold aird remit the corresponding withholding tax to the BIR during the year a person's income is earned. A taxpayer, however, contends that since a person's income tax under the law is due and payable only after the end of the year, the act of withholding the tax is an invalid payment of an obligation and is an undue deprivation of property without due process of law. Is the taxpayer's contention correct? What principle in taxation can you discern herein? Explain. 5. Distinguish taxation from police power as to purpose, basis, and benefits received. 6. What is a regulatory tax? Is the margin fee an example of a regulatory tax? Explain. 7. What is the distinction between a direct tax and an indirect tax? When a manufacturer passes on the percentage sales tax to the purchaser, is he not going against the principle in taxation that taxes are personal and may not be assigned to another person or entity? ExpIain. 8. A Iaw imposes a tax of 115 of 1% of the export price of prawns produced in the Philippines. The law provides that the proceeds of the tax shall be turned over to the Philippine Prawn Growers Association, Inc. (PPGA), a non-profit private corporation registered with the Securities and Exchange Commission to be used by the PPGA exclusively to undertake activities that promote the growth of the Philippine prawn industry such as undertaking research on how to improve the productivity of prawn farms in the Philippines, undertaking marketing activities to promote the export of Philippine prawns abroad and similar activities that will directly further the growth of the industry. The members of PPGA constitute 90o/o of all the prawn growers in the country representing 100% of the country's prawn exports. JN, a practicing lawyer and taxpayer filed a suit with the Suprerne Court questioning the constitutionality of the law on the ground that the funds raised through taxation wiII be used for a private purpose. WiIl said suit proper? Explain. (1988 Bar) 9. In 1985, Bolinao Manufacturing Corporation (BMC) sold steel bars to the Philippine Government through the Department of Public Works and Highways. BIVIC stiil has an uncontested Pl.0 Miltion 50
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l,lN
l,lliAL PItl NCI Pl,l'ls
r,,,.r!,il1)le from the Government by virtue of the sale of the steel lrrrr', ln 1986, BMC overpaid the Bureau of Internal Revenue f 'ol),000 in corporate income tax, an amount not contested by the Itllt l,rrt, which has remained unrefunded. For calendar year 1990, I tN l( ' r rrl,icipates to pay the BIR a corporate income tax of ?2.5 Million l,r !rrl tro of an unexpected windfall income in the last quarter of t!r,ro May BMC offset all its receivables from the Government in t,i,r tl]rl payment of said anticipated P2.5 Million corporate income lir,, rn 1990? Explain. (1990 Bar) tt), 'l'he police power, the power to tax, and the power of eminent ,1,,r!urr1 are inherent powers of government. May a tax be validly r,,,;,,,r;t,tl in the exercise of the police power and not of the power to Lr ' Il'.your answer is in the affirmative, give an example. (1991 Bar) " I l. Sometime in December 1980, a taxpayer donated to his son I oo() s|ares of stocks of San Miguel Corporation. For failure to file ;, rlorr()rl)S return on the donation within the statutory period, the r .r \ l)iryor wa-s assessed the sum of F102,000 as donor's tax, plus 25% ,rr, lurrge or F25,500 , and 20% interest or F20,400, which he paid ,'n .lurte 24,1985. ( )D Aug. 10, 1986, he filed his income tax return for 1985, claiming ,11(,11{ others, a deduction for interest amounting to P9,500 and r,,lr,rting a taxable income of P96,000' on Nov. 10, 1986, the taxpayer filed an amended income tax rr,lrrrn for the same calendar year 1985, claiming therein an ,r,l,l rt.ional deduction in the amount of F20,400 representing interest 1,;r rr[ tln the donor's gift tax. A claim for refund of aileged overpaid income tax for 1985 was Ir llrl with the Commissioner, which was subsequently denied. Upon appeal with the CTA, the Commissioner took issue with tlrc CTA's determination that the amount paid by the taxpayer as r rrl,crest on his delinquent taxes is deductible from gross income for ilrirt same year pursuant to Sec. 29 (b)(1), NIRC (now, Sec' 34[B]t1l' reeT NIRC). The Commissioner of Internal Revenue pointed out that a tax is rrot, an indebtedness. He argued that there is a fundamental I
,lrstinction between a "tax" and a "debt." According to the
)ommissioner, the deductibility of interest on indebtedness from a lrcrson's income tax cannot extend to interest of taxes. (a) What is your opinion on the argument of the Commissioner ( hat, a tax is not an indebtedness so that deductibility on the interest rn taxes should not be allowed?
(
51
LAW OF BASIC TAXATION IN THE PHILIPPINES
(b) Distinguish between the legal concepts oftaxes and debts. (c) Pursuant to the National Internal Revenue Code, for interest to be deductible what are the requirements to be met? Explain. (1992 Bar) 12.
Are motor vehicie registration fees taxes or Iicense
Explain.
fees?
Chapter
II
I,IMITATIONS ON THE TAXING POWER INIIERENT LIMITATIONS ON THE TAXING POWER. Irrlr.rr.rrt, Iimitations are so called because they proceed from the i lr v rrirl,rrre of the taxing power itself. As stated by an authority on iu r rr ( ron, the taxing power has very distinct and positive limitations ,rrirrr,' ol'which inhere in its very nature and exist whether declared ,f rr(ll, rlcclared in the written constitution (1 Cooley 211). 'l'rrxution is bound in its exercise by its own nature, essential and purpose (In the Matter of Washington St., 69 Pa. Iit |tLil;see McFadden u. Longham, 58 Tex. 579). 'l'lrose inherent limitations on the taxing power are: (a) Public I'ru t)ose of taxes; (b) Non-delegability of the taxing power; tr r 'l'r'rritoriality or situs of taxation; (d) Tax exernption of the { l,ivr.rnffirert; and, (e) International comity.
,.lrrr lrrct,crristics
A. Public Purpose
of Taxes - It is the first requisite of lawful
ll rrrl,ion that the purpose for which it is laid shall be upg}]l_g purpose 1 I t 'ooley 212). Public purpose in taxation is important because of ,rll I,lrc powers of government, that of taxation is said to be the ,rlrorrgest as it can be readily employed against one class of rrrrlrviduals in'favor of another so as to ruin one class and give
rrrrlrrnited wealth'and property to another, if there is no implied lrnr r (,ution on the uses for which such taxing power may be exercised 1 t {:ooleY 398). According to a U.S. case, "to lay with one hand the power of the fi(|vcrnment on the property of the citizen and with the other to lrr,rl,ow it on favored individuals to aid private enterprises and build r r I r private fortunes, is nonetheless a robbery because it is done under tlrc lbrms of law and is called taxation" (Citizens Sauings & Loan .1,;s)r o/ Cleueland, Ohio u. City of Topeha, 20 Wall. tU.S.l 655, 663, :t:: L. Ed. 455). What are the tests for determining the public purpose in a tq,x? ( lnc test is whether the thing to be furthered by the appropriation ,'l'public revenue is something which is the duty of the State, as a liovernment, to provide (Waples u. Maruast, 108 Tex. 5, 184 S.IY. ftt}, L.R.A. 1917 253). Another test is whether the proceeds of the tax wiII directly promote the welfare of the community in equal measure. The right
58
53
Ln
w ol,' tlASto 't'AXAl'toN tN ,t'il t, t,llil,tpplNES
to tax depends upon the ultimate use, purpose and object for which the fund is raised. There is no power to tax an object which is not
within the purposes for which governments are established (1 Cooley 384).
Included as being within the public purpose iimitation are taxes
that would raise revenue for the general expenditures of the Government, infrastructure and other public works, projects such as the construction and maintenance of roads, bridges and highways, social welfare and amelioration such as charity and self-help projects
for the infirm, destitute and handicapped persons, protection,
security and defense, and similar other functions. The promotion of the general welfare is the State's paramount concern. Thus, a law imposing a tax on sugar produced by sugar centrals for the purpose of using the proceeds thereof in the rehabilitation and upliftment of the sugar industry is a tax levied for a public purpose (Lutz u. Araneta, 98 Phil. 148). In the imposition of taxes, public purpose is presumed. Hence, it was held in a certain case that where an ordinance did not specifically state the purpose for which the tax was to be used, it is presumed that said tax is created for a public purpose (Mendoza Santos & Co. u. Municipality of Meycauayan, et al., 94 Phil. 1047 IUnrep.J).
In one case, there was a law (R.A. 1635) which required a semipostal stamp on mail matter berween Aug. 19 and Sept. B0 of each year to raise funds for the Philippine Tuberculosis Society. The validity of the tax was upheld by the Supreme Court because the Court ruled that the eradication of TB as a contagious disease is a public purpose (Gomez u. Palomar, etc., et al., L-23645, Oct. Zg, l96S). The collection of market stall fees by a private organization validly delegated does not adversely affect the public purpose of the imposition considering that the proceeds of collection thereof will be devoted to a public use (Bagatsing, etc., et ol. u. Ramirez, etc., et al,, L-41631, Dec. 17, 1976). It should be observed, however, that under the Local Government Code, one limitation on the taxing power of Iocal government units is to the effect that "the collection of local taxes, fees, charges and other impositions shall in no case be let to any private person" (Sec. 130[cJ, Local Gouernment Cod.e).
-,,8. Non-delegability of the Taxing Power - In the distribution of the powers of government into three departments, namely, Iegislative, executive and judicial, the power of taxation is exclusively legislative (51 Am. Jur.71-72). Consequently, the taxing 54
I,I MI'I'A'|IONS
ON'IIIE'TAXING
POWEIT
general rule may not be delegated. ( lcrtain notable exceptions to non-delegability may, however, be rrrlrrt,ioned. I. Under the Constitution, Congress may expressly authorize tlrr. I)resident to fix within specified limits, and subject to such lrrrrrtations and restrictions as it may impose, tariff rates, import rrrrrl cxport quotas, tonnage and wharfage dues, and other duties or rrrr posts within the framework of the national development program ,,1 llre Government (Sec. 28[2], Art. VI, 1987 Constitution). t,,,w(,1' as a
'l'he power granted to Congress under this constitutional ;,r',,vision to authorize the President to fix within specified limits ,rrrrl subject to such limitations and restrictions as it may impose, trrli['('rates and other duties and imposts includes tariff rates even l,r' rr:Vsnu€ purposes only. Customs duties which are assessed at tl'r, prescribed tariff rates are very much like taxes which are lrr,tltrently imposed for both revenue-raising and regulatory purposes tt i,rrcia u. Executiue Secretary, et al., G.R. No. 101273, July 3, 1992). 2. Another exception is in the case of the local taxing power. 'l'lrr, Constitution on this point states: "Each local government unit ',lr:rll have the power to create its own sources of revenues and to li'\,.y taxes, fees and charges subject to such guidelines and limitations rr:; I he Congress may provide, consistent with the basic policy of local ,rul,onomy. Such taxes, fees, and charges shall accrue exclusively to tlr,' Iocal governments" (Sec. 5, Art. X, 1987 Constitution). It has been held that the general principle against the delegation ,,l ltrgislative powers as a consequence of the theory of separation of t,i)wers is subject to one well-established exception, namely, that l,,11islative power may be delegated to local governments. The theory ,,l non-delegation of legislative power does not apply in matters of lrrt'rrl concern (Pepsi-Cola Bottling Co. of the Philippines, Inc. u. City ,tl l)u,tuan, et al., L-22814, Aug. 28, 1968). In the case of William Lines, Inc., et al. u. City of Ozamis, et al. t L i15048, Apr. 23, 197 4), the Supreme Court ruled that the delegation ol t,axing powers to Iocal governments is an exception to the principle ,,1'non-delegability of legislative power. Thus, the power of the City , l' Ozamis to impose a gross sales tax of one-half percent on the gross l rcight and fares of the cargo and passengers shipped or transported ,,rrt, from Ozamis City by vessels plying between that city and other r
""T;]Jitljl"l?",1r,r,^tive
taxing power to rocar governments is lrrstified by the necessary implication that the power to create g,olitical corporations for purposes of local self-government carries 55
t^w 0t' BnstcTAxAl.lON tN'l'ttll t,ilILtpptNEs with it the power to confer on such local government agencies the authority to tax (Pepsi-cola Bottling co. of the philipplnes, Inc. u. Municipality of Tanauan, Leyte, et al., L-Ji 156, Feb.'if, t9T6). The court, in the above-cited case, exprained that in delegating to local goverhments the authority to levy taxes, the state is not limited to the exact measure of that which is exercised by itself. when it is said that the taxing power may be deregated to municipalities and the like, it is meant that there may be dlelegated
such measure of power to irnpose and collect taxes as ihe legislature may deem expedient. That being the case, munieipalities may be permitted to tax subjects which, for reasons of public policy, the state has not deemed wise to tax for more general purpos*s. -' However, despite the grant of taxing power to rocar governments, _
judicial admonition is given to the effectthat the tax si levied must be for a public purpose, uniform and does not transgress any c_onstitutional provision or is not repugnant to a controlling statute (Villanueua u. City of lloilo, L-Z6S2t, Dec. 28, t968). whenever delegation of legislative power is the issue, it is important to know the distinction between tax legislation and tax administration. This is so because if what is "clelegated is tax legislation, the delegation is invalid; but if what is invilved is only tax administration, the non-delegability rule is not vioiated. Every system of taxation consists of two parts: (1) the erements that enter into the imposition of the tax; and, (2) the steps taken for its assessment and collection (r cooley /9J). one is legllation, the other is tax administration. *". Non-delegable legislative powers, that is to say, those ihat cannot be delegated to administrative agencies, include ihe @/selection of the property to be taxed; (b) determination of the prr"pl"", for which taxes shall be levied; (c) fixing ofthe rate oftaxation; and, (d) rures of taxation in general (1 Cooley 1g4). Delegable powers which are not legislative include (a) the power
to value property for taxation in pursuance of fixed ruies; (b) the equalization of assessments by a central bcdy; and, (c) collection of taxes (1 cooley 1g5). rn short, assessment and collection are not legislative but only administrative matters. In brief, legislation is making the law, while tax administration is giving effect to the law (J Coaley 196). A case which illustrates the nature and extent of tax administration is smith Beil & co. (phil.), Inc. u. commissioner of Internal Reuenue (L-28271, Juiy 2b, lgTb). The petitioner in that
I,IMI'I'A'I'IONS ON THI4 TAXING POWER
rlisputed the classification by the Commissioner of imported ra,rr. us "sparkling wine" which resulted in the assessment of a ,l,.lrcrr,ncy tax. The petitioner contended that the taxing provision 1, i, r' l.:)lal; now, Sec. 139, 1997 NIRC), aside from laying down an rrr,,rrl'l'icient and hazy standard for ascertaining the policy and I'rr t)os(, of the law, gave the Commissioner blanket authority to ,lr.r'rrlr, what is or what is not sparkling wine in disregard of the ,,,,rr rlrrlogability rule or the doctrine of d.elegatus non potest delegari ,,', wr.llas the due process clause of the Constitution. 'l'lre Court, however, ruled that the provision in question clearly ,r rr I r rrtlisputably discloses the legislative will leaving to the officers , l,,rr'1:ed with implementation and execution thereof no more than t lr,, rrtlministrative function of determining whether a particular kind .l wrne or imitation wine falls in one class or another. In the 1,,.r'lirrrnance of this function, the internal revenue otTicers are ,l,,rrronstrably guided by the sound, established practice and l ,.r lr rrology of the wine industry as aged and widely dispersed as one , ,rr care to know (Srnith Bell & Co. fPhil.], Inc. u. Commission'er of I rr t r' r' n al Reuenue, supra).
, ,r,,r'
r
(1. Territoriality or the Situs of Taxation 'l'he Situs Principle in General - Territoriality or the situs of trrx:rtion, which means "pleqq of taxation," is a limitation on the t;rxing power. This is so because the principle is weil-recognized I lr:rt,, however broad the power of taxation may be as to its character ,,rrtl no matter how searching it is in its extent, such power is ,,,,r:essarily limited only to persons, property or businesses within rls jurisdiction; that is to say, to subjects within its jurisdiction, or ,,vcr which it can exercise dominion (Shaffer u. Carter,252 U.S. 37, i4 L.8d.445,40 S. Cr. 221; Louisuille & J. Ferry Co. u. Kentucky, /,tB t/.S. 384 47, L. Ed" 513, 23 S. Ct. 463; Dewey u. Des Moines, 173 U S. 193, 43 L. Ed. 665; i9 S. Cr. 379 citedin 51 Am. Jur. 457). As aptly stated in decided cases, "all subjects over which the r;overeign power of a state extends are objects of taxation but those over which it does not extend are, upon the soundest principles, cxempt from taxation" (Curry u. McCanless,307 U.S. 357; 83 L. Ed. 1339, 59 S. Ct. 900; 125 ALR 162; McCulloch u. Maryland, 4 Wheat lUSl 316;4 L. Ed. 579 citedin 51 Am. Jur.457). Some Basic Considerations
Affecting Situs of Taxation
l. Protection - Protection is a basic consideration that justifies the situs of taxation. One authority opines that a iegal situs cannot 57
LnW Ol,' IIASIO'I'AXA'IION
lN'l'll[] l,illt,lPPlNES
be given to property for the purpose of taxation where neither the property nor the person is within the protection of the taxing state (2 Cooley 954). For example, under our law, where the decedent at the time of his death was a non-resident alien, his real and personal properties which are situated outside the Philippines are not subject
to estate tax (Sec. 98,' now, Sec. 104, 1997 NIRC). However, ci,tizenship and residence are factors that justify the taxing situs even assuming that the property is situated outside the taxing jurisdiction like the Philippines. For instance, property wherever situated of decedents who are Filipino citizens, whether resident or non-resident as of the time of death, as well as of resident aliens are subject to estate tax (Sec. 77 in relation to Sec. 98,. now, Sec. 85 in relation to Sec. 104, 1997 NIRC). Actually, what is subject to estate tax here is not the property, but the transfer thereof. In the case of fire in surance couering property situq.ted in the Philippines, q.re the insurance premiums paid thereon taxable as against the insurer euen though the fire insurq.ruce contruct was executed outside the Philippines, and the insurqnce policy is deliuered to the irusured therein? The Supreme Court ruled that said premiums are taxable in the Philippines because the Philippine Governrnent must get something in return for the protection it gives to the insured property in the Philippines, and by reason of such protection, the insurer is benefited thereby (Manila Electric Co. u. Yatco, etc., 6g Phit. se). During the time when reinsurance premiums (covering risks situated in the Philippines), which were ceded to foreign reinsurers, were taxable to such foreign reinsurers, the Supreme Court in one case justified their taxability on the ground that the reinsurance premiums in question were afforded protection by the Government. Moreover, the recipient foreign reinsurer exercised rights and privileges guaranteed by our laws (Philippine Gucr.ranty Co., Inc. u. Commissioner of Internal Reuenue, L-22074, Apr. 30, lgGS). Reinsurance premiums ceded to the foreign reinsurer abroad are, however, no longer taxable (Sec. 28[BJ[1], 1997 NIRC). 2. Double Taxation ond the Situs Limitation - Double taxation is never invalid where it is imposed by different states. In determining situs, it is of no importance that the property has already been taxed or is subject to tax in another state. For instance, if a non-resident Filipino like a U.S. immigrant (non-resident citizen) receives income in the U.S. (country of source), that Filipino is subject to U.S. tax as well as Philippine tax on the same income. Both the Philippines and the United States have the right to tax the same income. There are, therefore, two situses of taxation in this situation. 58
I,I M I'I'A'I'I()NS ON'I'HIT TAXING POWER
It should Iike citizens, non-resident I,,. nol,()d that under the 1997 Tax Code, to subject are aliens l,'rlr1ri19 immigrants abroad, and non-resident sources' ln x ()n income derived from Philippine :t. The Moxim of Mobilia Sequuntur Persona'n7 and Situs of I,,rtrttirn - fi-ffiElGf;iflC maxim means "movables follow the personal property is 1rr,r.:ion." According to this maxim, the situs of of law intended fiction a merely is il,,,,lornicile of the owner. This justice does not where l,,r.r'onvenience and not to be controlling sequuntur mobilia of doctrine ,l,,rilrrrrd it. As stated aptly, the is not allowed to stand in the way of taxation of personalty t,t,t.:ionarn ', ,, I lro place where it has its actual situs and the requisite legislative l,rr.isri.iction exists (2 cooley 955-957), The maxim applies to the I rr xrrLion of personal property (Ibid'). 'l'l-rus, for instance, shares of stock may have a situs lbr purposes , ,l l rxittion in a state in which they are permanentiy kept regardless ,,1 llro domicile of the owner, or the state in which the corporation ,uru; t.,rganized (51 Am. Jur. 502). tn the case of wells Fargo Bank & union Trust co. u. collector ,,f lnternal Reueruue (70 Phit.325), the Supreme Court ruled that llr(} shares of stock left behind by a non-resident alien decedent in r n anonymous partnership (forerunner of corporations) in the l'hilippines are subject to Philippine inheritance tax notwithstanding tlte mibilia rule. According to the Court, the mobilia rule should shares of stock are also taxable in the situs of .y ield to reason. The t,lreir actual location, i.e., the Philippines. If the mobilia rule had been foltrowed in that case, the shares would not have been taxed in t.he Philippines since the owner died as a resident of a foreign country, and under Philippine law (Sec' 85, 1997 NIRC), properties left behind by a non-resident alien are taxable only if the properties are situated in the PhiliPPines. 4. Legislatiue Power to Fix situs - It has been opined that if no constitutional provisions are violated, the power of the legislature fo fix situs is undoubted (2 Cooley 90). For example, our law fixes the situs of intangible personal property for purposes of the estate and gift taxes. Under sec. 98 properties are 1.ro*, Suc. 104, 1g97 NIRC), the following intangible Philippines: the in situs properties with a as considered (a) franchise which must be exercised in the Philippines; t\1,,r.t. rirr
double taxation will be discussed in a later chapter.
r
(b)shares'obligationsorbondsissuedbyanycorporationor anonima organized or constituted in the Philippines in
socied.ad,
accordance with its laws; 69
r
t,AW Ot' llAslC'l.AXA.l.lON lN,t,ll t,i I,Hll,l
l,l,lNlrs
(c) shares, obligations or bonds issued by any foreign corporation eighty-five percentum (gb%) of the business of which is iocated in the Philippines; (d) shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; and (e) shares or rights in any partnership, business or ind.ustry established in the philippines. The law further provides, however, that no tax shall be collected under Title III of the code in respect ofintangibr" ,"r*""iproperty: (a) if the decedent at the time oi his rleath, or the donor at the time of the donation, was a citizen and resident of a foreign country which at the time of his death or donation did not imposei t";;"fu" tax of any character, in respect ofintangible personal property ofcitizens of the Philippines not residing inlnat io""igr, """ .irri"r, iul if the laws of the foreign country oi which the decedent or donor was a citizen and resident at th€ time of his death or donation allows a similar exemption from transfer or death taxes of or description in respect of intangible personal property "rr*"y-"iru"u"t", owned by citizens of the Ph,ippines not reslding in trrat r*"ig., .orrrrt"y. It will be observed from the foregoing enumeration that the various intangible assets therein are deerned t be assets with a Brinppu* situs as determined by domestic (i.e., philippine) raw. An inieresting question now arises: suppose there is in intangibie airet o1 a deced,ent which is nat anl.ong those enumerated, in, tte bw, would, it be justified to maintain tnit it is qn asset with a philippine situs because the "mobilia" rure d,oes not appry? or shourd, such asset be considered as being comprehenaea *tinin the mobf,tfairio"iotnt Bringing the problem into concrete terms, suppose A, a non'resident alien decedent reaves behind after his auutrr'"irl;uccount or note payable" of, say, p100,000 collectibie from B, anindi,idual who resides in the philippines. where is the situs of the obligation? Is it not accurate to say that under the above enumeratiorr, it 1s,. debt) has a Philippine situs because the abovecit"d lu*;;;;ks onry of corporate obligations? So, adverting to the ,ulu'r*prir-sio unius est exclusio olterius,"it may be said that the debt has ,o riririppi.," situs' May such obrigation, howeuer, be d.eemed. ,ru"rui by the mobilia rule? The bottom line here, therefore, is: In those cases where the situs for certain intangibles are not categorically spelred out as in the above situation, there is room for applying tie mobiri, rure. 60
I,IMI'I'A'I'I0NS ON TIIIT TAXING POWER
'l'ltr
Territariality Principle as Applied in the Philippine Broadly speaking, for Philippine tax purposes' the following ,r,r1, lro the factors that could interplay in a given legal situation ,r'lr.r.r.situs or territoriality is the focal question: I Kind or classification of the tax being levied; :l Situs of the thing or property taxed; '
Sit.us or
.! tt t nt!. -
:t. .l Ir (i.
Dornicile or residence of the person taxed; Citizenship or nationality of the person taxed; Source of the income taxed; and Situs of the excise, privilege, business or occupation being taxed. 'l'he above iterns may be explained through the different ,,r I rrtional incidents below: (r) Property Tax 'T'n considering the place at which property is trrr:rble and the governmental unit which may rightfully levy and ,,,llccL the property tax, the basic factor is the situs of the property ,rr rluestion. This is true whether such property is owned by the r'':;idents of the taxing state or by non-residents thereof. The property and personal 1,r iuciple applies both with respect to real of every State to tax ail The authority l,rrperty (51 Am. Jur. 457). is unquestionabie limits its personal, within 1,r'operty, real and 169 U.S. 421; County, Multnomdh 1,\ttuings snd Loan Society u. in the State power everything reaches l:l t,. Ed. B03). The taxing (Washington. Works Co. Iron, property rv Irich can be denominated as is taxable estate 1004). ReaI Pac. r,. f{ing County, 20 Wash. 150; 54 residence. owner's of the regardless rrr t,he State where it is located A State has no power to tax real property located outside its limits (2 Cooley 969). (Y:) Tax on. Persons - The rule is well'settled that a State may levy a personal tax upon persons subject to the jurisdiction of its scrvereignty (51 Am. Jur. 457). An example of a tax on persons is l,he community tax of P5.00 for individuals and ffi00 for corporations. (c) Income Tax -In general, the crucial factors that go into the sit,us probiem in taxation when it involves income tax are (1) nationality or citizenship of the taxpayer, (2) his residence or domicile, and (3) source of the income. Sec. 23 of the Tax Code of 1997, provides the following general principles of income taxation in the Philippines: '
rr
61
r
"Except whrn otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all ilcome derived from sources within and without the PhiliPPines; (B) A nonrcsident citizen is taxable only on income derived
from sources within the Philippines; (C) An indiridual citizen of the Philippines who is working and deriving income from abroad as an overseas contract workeris taxable only on income from sources within the Philippnes: Prouided, That a seaman who is a citizen of the Philippines and who receives compensation for servicesrendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall belreated as an overseas contract worker;
(D)
individual, whether a resident or not of the Philippines, is taxable only on income derived from
An
alien
the Philippines ; (E) A domesiic corporation is taxable on all income derived fror[ sources within and without the Philippines; and (F) A foreigr corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derivedfrom sources within the Philippines.,' For Philippine tax purposes, the kind of tax imposed is sometimes a crucial factorin determining whether the situs of taxation is in a particular taxing jurisdiction or not. In one case involving a foreign airline but whose airplanes do not carry passengers to and from the Philippines asithad no landing rights here, the Court ruled that for income tax purposes, said airline is taxable on the irrcome realized from the sale ofiis tickets in the Philippines tfrrough a sales office; but at the samelime, the Court observed that the airline would not be subject to anybusiness tax inasmuch as the absence of any landing rights would rnean that it is not engaged in the exercise of any privilege whichcould be subject to the business or privilege tax (Commissionerof Internql Reuenue u. British Ouerseas Airways Corp., et al., G,l,Nos. 65773-74, Apr. 30, 1987). It should benoted that under the present law, an international carrier doing business in the Philippines is taxabLe at two and one-half percenl(ZYzYo) on gross Philippine billings (GPB) "derived from carriage ofpersons, excess baggage, cargo and mail originating sources 1yithin
from the Philippines in a continuous and uninterrupted flight, irrespective of itre place of sale or issue and the place of payment of
l{
I,IMI'I'A'I'I()NS ON 1'HI]'I'AXING POWEIi
I,AWO!'BASIC I'AXA'TION IN THE PHILIPPINF]S
62
f
lr,. tr, lrcl or pussugc document: Prouided,
That tickets revaiidated,
indorsed to another international airline form part =*, ( ,,1 r lr,. lr',rss l'hilippine Billings if the passenger boards a plane in a l,,,rt ,,f sroirtt, in the Philippines: Proulded further, That for a flight l,,r rr1,,r,rl irtrcl/or
*lrr, lr ,,r'iginates from the Philippines, but transshipment of trH,iLi,,nti(,r.
takes place at any port outside the Philippines on another
g1lrrr,., orrl.y the aliquot portion of the cost of the ticket corresponding lH tlrr, 1r,11 I'lown from the Philippines to l,,r-rrr part of the Gross Philippine
=lrrrll
the point of transshipment Billings" (Sec. 28 tAlt?ltal'
t4,t, Nlll(:).
or Priuilege Taxes' Where the tax that is being Ilrl',r,r(,(l is a tax upon the performance of an act, enjoyment of a
r,l)
llx<:ise
known
Irf r I r l('ti(', or engaging in an occupation, or what is sometimes ry1 inr i.x(:ise or privilege tax, the situs of taxation is the place
in in. is engaged olrr, lr Ilrc act is performed or where the occupation
!1rr rrr llrr,case of sales tax imposedby a city government, for instance, I 1,, r r I I r rr g in one case is that it is the place where the sale is perfected
lrnll ( ()lsummated that determines the situs of taxation (Allied Ittr,',t,1 ()o., Inc., et al. u. City Mayor of Manila, et al-, L'40296'
i\",, :'1,1984). ll rs noteworthy that the legislative power to fix the situs of t,rrirtrorr includes the power to fix the place of taxation between ,lrll,,r.rrt, places in the same state (2 Cooley 959-60). lrr local taxation, as in the case of the sales tax (which is an ,.i, r',, or privilege tax), the situs of the sale or transaction (i.e., where tl,, ,,rrlt, Lakes place) is not necessarily the situs of taxation, unless Irr tlrr. situs of the sale the taxpayer maintains a branch office in ,r lr|i lr t,vert, 100% of the sale is taxable by the city or municipality ,r lrr.r'r,t,[re branch is located (Sec. 150, Local Gouernment Code)I I t,he situs of the sale is one where no branch office is maintained, tlr, il ll07o of the sale goes to the local government unit (city or ,,r,,,'rr:ipality) where the taxpayer's principal office is located and I 1,,. r.r.rrrainrng 7Oo/o is taxed by the local government unit where the Lr \ t)il.yer maintains its factory (Ibid.). In the latter case, therefore, ,,rtrr:i o['the sale is not a limitation on the taxing power of the local r,,,\.(,r.r)ment unit where the taxpayer establishes its principal office rr rr,l llrctory. ,l'lre principie that situs of taxation is determined by the situs of tlr,'r;rrle may in some cases bow down to statutory rules depending ,,rr wlurt situs policy the taxing power at a given point desires to t,rr! r;uc. The rule of situs oftaxation for business taxes is discussed rr rr()rc detail in a later charrter. 63
LAW OF BASIC TAXA1'ION IN'I'IIE I'TlII,IPPINES
I,IMI'I'i\'I'IONS ON TTIE TAXING POWER
On the basis ofcourt rulings, it is necessary to point out that the situs of the sale for tax purposes is not the place where the contract of sale is perfected but the place of its consummation. Hence, in the case, for example, of the additional sales tax on the sale of fuels and oils, said tax may not be applied to deliveries outside the municipality since the consummation of the sale is determined by the delivery of the things vrhich are the subject matter of the contract (The Shelt Co. of the Philippines, Ltd. u. Municipality of Sipocot, Camarines Su,r, 105 Phil. 1263 [Unrep.J). In one case, however, the Supreme Court ruled that the city can tax the sale of matches where shipments or deliveries are made direcbly to customers outside the city provided the sales are booked and paid for in the city to a carrier for shipment to the buyer. Generally, delivery to the carrier is delivery to the buyer (Philippine Match. Co., Ltd. u. City of Cebu, et al., L-30745, Jan.. 18, 1975). In situations involving brokerage as in the case of a broker, for instance, the rule is such that a lclcal broker is taxable in this country with respect to the commissions received by it for negotiating and consummating the sale in Japan of products belonging to a Philippine corporation (A" Soriano Y Cia u. Collectoi'of Internal Reuenue, l0l Phil. 504). What is important here is that the broker's tax is not being levied on the sale ofthe goods in Japan but on the taxpayer's brokerage services in the Philippines. Incidentally, brokers are subject to the 10% value-added tax (Sec. 108, 1997 NIRC).
,,,rr:rrtle-ration or otherwise to a taxable person (Sec. 234[a], Local
I). Exemption of the Government from Taxes - It seems that as a matter of public polrcy, property of the State and of its mu nicip a I subdivisions.devoted tp gevernmept-use +a nd rr urpo ses is generaily deemed to be exempt from taxation although no express provision in the law is made therefor (51 Am. Jur.503). Tax exemption of government entities and the political subdivisions of the State seems to be a well settled principle (Ibid.). The exemption frorrr taxation of the Government and its political subdivisions might also emanate from a statutnry grant. This is obviously in conformity with the abovementioned principle. For instance, under Sec. 28(b)(8)(B) of the Tax Code (now, Sec. 32[B][7][bJ, 1997 NIRC) income derived from any public utility or from the exercise of any essential goyernment function accruing to the Government or any political sutrdivision i.s exempt frorr income tax. Also, under the Local Government Code, real property owned by the Government or any of its political subdivisions is cxrrrnpt from real property tax unless the beneficial use thereol'is grirrrted for
64
|
:| )
t
tt,
t' tL
metll COde).
ll
is significant to note that the Consitution does not contain rovision granting tax exemption to the Government. Obviously, r lr,' r tirson for this is that the Government's exemption from taxes is ,, rr rrrllerent limitation on the State's taxing power. Notwithstanding the immunity of the Government from taxes, tl,r' lrrinciple is also weII recognized that the Government may tax rt:;r,ll'. In one case, the Supreme Court held that there is no , ,,rrst,itutional limitation on the power of Congress to tax the Armed ,,
,r
1,
1r
l'rrr:os of the Philippines if it wishes to do so (Bisaya Land I'rttnsportation Co. Inc. u. Collector of Internal Reuenue, 105 Phil. t:i:tB [Ururep.]). [,'or example, a contractor who undertakes a job
contract for the l,vcrnrn€rrt is not justified in claiming that it should be exempt l.orn the payment of the contractor's tax simply by arguing that if ,: r.y rnent thereof were insisted upon, he would just shift the tax over t,r l,he Government; and that, as a consequence, the Government
(
1
r.y ing the tax as part of the purchase price of the contractual services ,.rrdered would be taxing itself.
I r;
'
E. International Comity - More often than not, states find it rrrutually advantageod6 for themselves to create self-imposed rlstraints on their taxing powers especially with reference to the properties of foreign governments within their territorial domain. Itcciprocity lies at the root of this limitation for it cannot be denied t lrat lvith reciprocity located at the bottom line, harmonious and p
roductive relationships among the various states can be maintained.
An authority on taxation has this to say on the subject of nternational obligations: "International obligations concominant with our acceptance ofthe principles ofinternational law as part of our law demand that certain representatives of foreign states stationed and property of such foreign states found within our l.erritory be exempted from taxation x x x" (Matic, Taxation iru the l'hilippines, p. 63). It is significant to note that Sec. 12, Art. II of our Constitution declares that the Philippines "adopts the generally accepted principles on international law as part of the law of the land and i
adheres to the policy of peace, equality, justice, freedom, cooperation
and amity with all nations."
65
,
I,AW OI,' I]ASIC] TAXA'I'ION IN'I'II
I' PIIII,IPPINI'S
r,tMl'r'A'r'roNS 0N 1'lili'l'AxlNG PowEIt
The above observation seems to be reflqted in the following provision of the Local Government Code on the c\mmunity (formerly,
\
"Sec. 159. Exemptions - The following are\exempt from
the community tax; \ (1) Diplomatic and consular representatives;
xxx." CoNSTITUTIoNAL LIMITATIoNS oN THE YPOWER. provisions The following
prescribed
TAXING
may be said to be the limitations
in the Constitution on the taxing
power of the
Government:
(a) Due process clause, whether it be substantive or procedural (Sec. 1, Art. Iil); (b) Equal protection of the laws (Sec. 1, Art. III); (c) Freedom of speech and of the press (Sec. 4, Art. III); (d) Non-infringement of religious freedom and worship (Sec. 5, Art. III); (e) Non-impairment of contracts (Sec. 10, Art. AD; (0 Non-imprisonment for debt or non-payment of poll tax (Sec. 20, Art. III); (g) Rule requiring that appropriations, revenue and tariff bills shaII originate exclusively from the House of Representatives (Sec. 24, Art. VI); (h) Uniformity, equitability and progressivity of taxation (Sec. 28[1], Art. VI); (i) Limitations on the congressional power to delegate to the President the authority to fix tariff rates, import and export quotas, etc. (Sec. 28[2], Art. VI); (j) Tax exemption of properties actually, directly and exclusively used for religious, charitable and educational purposes (Sec. 28[3], Art. VI); (k) Voting requirement in connection with the legislative grant of tax exemption (Sec. 28[4], Art. VI); (I) Non-impairment of the jurisdiction of the Supreme Court in tax cases (Secs. 2 a.nd 5, Art. VIil); and (m) Exempiion from taxes of the rerrenues and assets of educational institutions, including grants, endowments, donations and contributions (Sec. 4[3] and [4J, Art. XIV). bt)
'l'hcrc are, however, certain provisions in the Constitution which ,rrc r)t)t actually limitations on the taxing power but which have a l,,.rrring on taxation. Such provisions are: (rr) Constitutional requirement on the subject and title of bills (Sec. 26[1], Art. VI); (b) Power of the President to veto any particular item or items in an appropriation, revenue or tariff bill (Sec. 27[2], Art. VI); (r:) Provision which requires that no money shall be paid out of the Treasury except in pursuance of an appropriation made by law (Sec. 29[1], Art. VI); (d) Frovision against the appropriation of public money or property for the benefit of any church, sect or system of religion, etc. (Sec. 29[2], Art. VI); (c) Provision which mandates that money collected on a tax ievied for a public purpose shall be paid out for such purpose only (Sec. 29[3], Art. VI); and (f) Provision regarding allotments to Iocal governments (Sec. 6,
Art. X)" ('ONSTITUTIONAL LIMITATIONS EXPLAINED
A. Due Process of Law - Sec. 1, Art. III
of the Constitution person of life, Iiberty, part shall deprived "(n)o be in that ;,r'ovides ,,r' property without due process of law." In the tax sphere, there lrrrve been occasions when the Supreme Court ruled on the ,,,rrstitutionality of certain taxing measures where due process of lirw was the focal question. In the case, for instance, of. Kapatiran ntt mgct Naglilinghod sa Pamahalaan ng Pilipinas u. Tan, etc. (G.R. Nos. 81311,81820,81921 and 82152, June 30, 1988), the Court ruled
lnt due process was not violated rr"hen the VAT la',v (8.O. 273) was promulgated because there was no grave abuse of discretion incident I
l,
its promulgation. The Court also pointed out that petitioners llriled to show that 8.O.273 was issued capriciously and whimsically or in an arbitrary or despotic manner by passion or personal hostility :;ince it appears that a comprehensive study of the VAT was made lrtrfore 8.O.273 was issued.
It should be noted in this connection that when tlie
r:onstitutionality of a legislative taxing act is questioned on the llround that there is a denial of due process, an actual case or r:ontroversy must first exist before the courts can be called upon to 67
LAW OI.' IJASIC'I'AXA1'ION IN 1'II
T,.]
PIIII,IPI]INI'S
rule on said issue. In the case, for instance, of Tolentino ,r/n, Secretary of Finaruce, et al. (G.R. No. 115455, Aug. 25, 7994), and companion cases, the Court said: "x x x There is, however, no justification for passing upon the claims that the law (i.e., Expanded Value Added Tax Law or R.A. 7716) x x x denies petitioner's right to due process. x x x Indeed, the absence of threat of immediate harm makes the need for judicial intervention less evident and underscores the essential nature ofpetitioner's attack on the law on the ground (of) denial of due process x x x as a mere academic discussion of the merits of the law. For the fact is that there have been no notices of assessments issued to petitioners and no determinations at the administrative levels of their claims so as to illuminate the actual operation of the law and enable us to reach sound judgment regarding so fundamental questions as those raised in these suits." Adverting to its previous decision in the VAT case of Kapatiran ng mga Naglilingkod sa Pamaholaan ng Pil.ipinas, Inc., et al. u. Tan, elc. (G.R. No. 81311, June 30, 1988), the Court further said: "At aII events, our 1988 decision in Kapatiran case should have laid to rest the questions now raised against the VAT. There, similar arguments made against the original VAT Law (Executive Order No. 273) were held to be hypothetical with no more basis than newspaper articles which this Court found to be hearsay and without evidentiary value. As Republic Act No. 7716 merely expands the base of the VAT system and the coverage as provided in the original VAT Law, further debate on the desirability and wisdom of the law should have shifted to Congress." f( Wh"r, a tax turns out to be of a confiscatory nature, such an imposition could very well be considered as being violative of the due process principle. In one case, the Court ruled that the due process clause in the Constitution may be invoked where a tax statute is so arbitrary that it finds no support in the Constitution. An obvious example is where the same can be shown to amount to confiscation of property. Classification for taxation must not be prornpted by a spirit of hostility or discrimination that finds no support in reason (Reyes, et al. u. Almanzor, et al., G.R. Nos. 4983g-46, Apr. 26, 1gg1). Again, in another case (Slson., Jr. u. Anchetq,, etr:., t:l al., G.R. No. 59431, July 25, 1984), the Court held that the modified schedular income tax whereby individual income was classified into 68
I,IMI'I'A'IIONS ON'I'HU'I'AXING POWER
tl,r,',' rlil'l'crent classes under different tax rates (compensation, lrrr ,rrrr,r;s/ot,her income and passive investment income) is not a denial ,,1 ,lrrr. l)rocess because there is no proof of arbitrariness in the
uul,r':lti0rt of tax rates. Irr uuc case, it was held that due process is not violated if a iir,\., r'nrncntal body like the Fiscal Incentives Review Board (FIRB), ,. lr r,.lr was tasked with the duty of recommending the restoration of rrr r r,xt'mptions previously abolished under presidential decrees, is li,.;,,1,,t1 by the Minister (now, Secretary) of Finance, who at the same I r n !, r:i t,[re very same person who approves or disapproves the FIRB's r,'r ,rnrrlcndation provided no two opposing or conflicting interests ,r,. urvolved, Iike the case of the restored tax exemption of a l,,rrlrcular taxpayer where it appears that there is no interest that 1 , r'xrstiDg which is in conflict with the interests of such taxpayer 1ll,tt'r'rl.a u. Macaraig, Jr., etc., et q.I., G.R. No. 88291, May 31, 1991). ( )rr the other hand, the Court ruled in the case of Villegas u. Hiu t'tut,ntl Tsai Pao Ho, et al. (L-296a6, Nov, 10, 1978), that there is a ,l, rrrrl of due process on account of the passage of an ordinance in tl,,' ( lily of Manila which imposes a permit fee of F50.00 on aliens as ir r ,rrtlit,ion to employment or engaging in any business or occupation, . l , ,r'c it appears that under said ordinance, the City Mayor of Manila , , ,,r lr I withhold or refuse issuance of such permit at wiII. The Court 1,, r rrl ctl out that aliens, once admitted in the Philippines, cannot be ,1,.1,r'ived of life without due process of law and this guarantee rrr,.l11slss the means of livelihood. ln the case of Prouince of Abra u. Hernq,ndo, etc., et q.l. (L-49336, \,r1i.31, 1981), the Supreme Court held that due process was not ,,lr::r,rv€d when the trial court, in an action for declaratory relief, ,1,., 1;rred that certain property owned by the Roman Cathoiic Church ,,, llrrngued, Abra was tax-exempt under the 1973 Constitution, it .' 1r;itrapiqg that no court hearing was conducted thereon. iiimilarly, in another case (Commissioner of Customs u. CTA, et ,,1 , G.R. No. 70648, July 31, 1987), the Court also held that the rrrporter of goods is deprived of procedural due process when t:alled "alert notices" (i.e., valuation of goods made by Finance ',, ,\liuches abroad) were not presented in the Customs protest lrr.oceedirrgs in the Bureau of Custorns as we]i as in the Court of Tax \trr1reais when the case was on appeal therein. Inciclentally, the "alert ,,,l,ices" contained a higher valuation of the irnported goods than llrt,vah.lation indicated in the knport Entries covering the goods in |
,
,
lr
tr"Stion.
69
r L,AW
Ot' llASlC,l'Axn'l'lON lN'l'lIl,' PlIll,llrPlNl,ls
I,I MI'IA'I'IONS
B. Equal Protection of the Law
- The Constitution doesnot only speak of non-deprivation of due process but in Sec. 1, Art lll thereof, it also emphatically ordains that "x x x nor shall any person be denied the equal protection of the laws." With particular reference to taxation, it has been aptly stated
that the power of the State to make rejggll\le and
naJu.pal
classifications for the purposes of taxation is unquestioned and such claGrTidations may relate to the subject of taxation, the kind of property, the rates to be levied or the-amounts to be raised, andthe methods of assessr,nent, valuation and co]lgction' ,Such power to classify in matters bf taxation GBaid to be broader than some other exercises of Iegislative power, entitled to presumption of validity and will not, as a rule, be interfered with by the judiciary in the absence of a clear showing of unreasonableness, discrimination or arbitrariness. However, the classification must be based upon real and substantial differences between the persons, property or privileges and those not taxed must bear some reasonable reiation to the object or purpose of legislation or to some permissible governmental policy or legitimate end of governmental action (see Tomas P. Matic,Jr., Taxation. in. the Philippines, Vol. I, pp. 79'80). It is recognized that Congress can make distinctions and classifications. Thus, it can, for example, classify taxpayers into "calendar year" and "fiscal year" taxpayers for income tax purposes (Manila Times Pubtishing Co., Inc. u. Commissioner, CTA Case No. 2263, Dec. 17, 1973). * tt equality of taxation rule, therefore, is not violated if " or distinctions are made as long as the saililr-dTiIed' classifications on reasonable and substantial differences. For instance, there is a reasonabi6-basis for imposifif lower rates on the foreign'sourced income of non-resident citizens as evidenced by the preferential or Iower rates of 1%,2% and 3% because these are the people whoearn foreign currency abroad which are remitted here, as compared to the resident citizens who have to pay the ordinary graduated rates (Sec.21[a] and [b], 1977 NIRC). It should be noted that the preferential tax rates are no longer applicable on income of non-resident citizens abroad' Under the Tax Reform Act of 1997, non-resident citizens are taxable only on income derived from sources within the Philippines. Hence, beginning Jan. 1, 1998, income of non-resident citizens frorn foreign sources are not subject to Philippine tax (Sec. zafA][1J[a] and' [b], 1997 NIRC). 1n
ON'I'H!] TAX]NG POWER
our jurisprudence is replete with rulings on the equal protection r'lirus(,of the Constitution as it relates to taxation. In the following ,-uric,s, our Supreme Court has held that the equal protection principle rr':rr rrot violated: l. 'l'he value-added tax (VAT) law does not discriminate unduly ,,1,r nlsl customs brokers who are subject to said tax. The exclusion ,,1 ::irirl brokers from the exemption granted to professionals under rl.r' lt)3(r) of the Tax Code is justified by the fact that customs l,r,lirrs differ from tax-exempt professionals considering that the ,r, lrvit,ies of customs brokers (like those of stock, real estate and ,r, rrrrgration brokers) partake of the nature of a business rather than ,, 1,r'trl'ession (Kapatiran ng nt.ga Naglilingkod sa Pamahalaan ng I'tIr1tinas, Inc. u. Tan, etc., supra). :l The State has the inherent power to select the subjects of I ;r xrrl,ion and inequalities which result from the singling out of one 1,,rr I.rcular class for taxation or tax exemption infringed no , ,,rr;l,it,utional limitation. Consequently, the schedular income tax * lr r,'lr imposes graduated rates from 0% lo 35% without deductions rrrr lr)rnpensation income of individuals (except their personal and ,r,l,lrl,ional exemptions for qualified dependent children), and a rate ,, lr{'rne of from \Yo to 60% on business and other income with ,l,,,lrrr:Lions does not violate the rule on equal protection since there r, r,o infirmity if classifications are made to rest on substantial ,lr',trnctions (Sison, Jr. u. Ancheta, etc., et al., supra). ;l The remission or condonation of taxes due and payable to the ,,, lrrsion of taxes already collected does not constitute unfair ,1,,,, r'rrnination. Each set of taxes is a class by itself and the law ,,,,rrlrl be open to attack as class legislation only if aII taxpayers 1,, l,rrrging to one class were not treated allke (Juan, Luna Subdiuision, l,t, r,. Sarmiento, 91 Phil. 371). ,l A tax on an o'installation manager" is not discriminatory just lr.r r u SC at the time said tax was imposed, there was no other person r', I lrt, locality who exercised such occupation. The tax is and will be ,,1,;rlrr:irble to any person or firm who exercises such calling or ,,, ( r rl)r Lion designated as installation manager (Shell Co. of P.1., Ltd. r, 1',rricr, etc.,94 Phil.387). t, A law (R.A. 3843) which imposes a preferential franchise tax r rrl,. rrl 2%o on a particular franchise grantee while other franchise g r ir r l .cs are subject to 5% is not violative of the equal protection or ,,,1rr:rlil,y of taxation rule in the Constitution. The legislature has llr'' nrherent power not only to select the subjects of taxation but rrl,,rr trr grant tax exemptions (Commissioner of Internal Reuenue u. r
71
l,AW
*
OI l]ASl(l'l'AXn'l'l()N lN'l'lI lil I,lllt,ll,l,lNIJS
Lingayen Gulf Electric Power Co., In,c., l,-ZSf f l, Aug. 4, lgSS). 6. The fact that the taxpayer is the only sugar central or refinery in the municipality where the tax ordinance is enacted does not make said ordinance discriminatory (Victortas Miiling Co., Inc. u. Muruicipality of Victorias, L-21183, Sept. 2f , l96S). The reason for this is that since other refineries to be established in the future would also be taxable, no singling out of the taxpayer to its disadvantage has ever taken place. 7. There is no discrimination or class legislation if a statute authorizes the city of Manila to levy occupation taxes whereas that same authority is withheld from other cities and municipalities. It is not for the courts to decide what cities or municipalities should be so authorized for that is a matter for the legislature to decide (Pun.salaru u. Municipal Boord of tlte City of Manilu, gS phil. 46). 8. A tax levied on boarding stables for race horses is not discriminatory where it appears that no such tax is imposed on boarding stables for other types of horses (Manila Race Horse Trqiners Ass'n, Inc. u. De lq Fuente, 88 Phil. G0). In the following cases, how,ever, the Supreme Court ruled that the equal protection rule has been violated: a{ A tax ordinance levied an export tax on centrifugai sugar milled by the Ormoc Sugar Co., rnentioning only ;hifiom#ny by name. The ordinance does not satisfy the requisites of reasonable classification. Although Orrnoc Sugar Central was the only sugar central existing at that time, the ordinance is defective because even if a similar company is later set up, it cannot be subject to the tax since the ordinance specifically points to Ormoc as the one to be taxed (Arrtoc Sugar Co. trnc. u. Trea.surer of Orrnoc City, et al., L-23794, Feb. 17, 1968). /. There is discrimination where a local tax was imposed. on "agents or consignees of outside dealers" in softdrinks without said tax being levied also on local dealers. The classification of such "agents and consignees" who are taxable and "local dealers" who are exempt is not based on substantial distinction (Pepsi-Cola Bottling Co. ofrthe Phili,ppines, Iruc. u. City cf Butuan, et al., supra). /. A" emoloyment perrnit fee imposed on alien joLr applicants regardiess of the nature of employment (whether casual, perrnanent, part-tirne or fuil-time, or J"owly paicl employee or highly paid execr"itive) is constitutionally invalid because it fails to consider valid substantial differences in situation arnong the aliens requirecl to pay it. classification should be i:ased on real. and substantial differences 72
I,IMI'I'A'I'IONS ON THD TAXING POWER r r r g rr reasonable relation to the subject of lr rr ('lt,i.ong Tsai Pq.o Ho, et al., supra).
lr ir v t
legislation (Villegas
u.
.[. A local ordinance which levies an ad, ualorem tax on motor ,,'[rr,:lcs registered in Manila without also taxing those which are r,.1,ril,crcd outside the city but which enter the city and use its streets ,,, , ru;irrrrally violates the rule on the equality of taxation (Association ,,1 ('ustoms Brokers, Inc., et al. u. The Municipal Board, et al., ,t ; l'lti,L. 107).
#. Where it appears that Sec. 109 of the Tax Code (before its rrrrlrlied repeal) which required skimmed (non-fat) milk
f,acturers to place a warning sign on their products stating that ',Irrrrmed milk is "not suitable for feeding infants less than one (1) r
r r
rr
r
r
tr
is enforced only against manufacturers of evaporated filled ,,,rlh and noL against makers of condensed skimmed milk like : :l M ILAC, SMA or BREMIL, such action is discriminatory and is ,' ,l,,rrial of equal protection of the law (Vera, etc., et al. u. Cueuas, t .i:|(;93-94, May 31, 1979). Like in the question of alleged denial of due process, judicial ,rvention , ,I is also unnecessary in the absence of a factual setting ,,r ;rn actual controversy which is engendered by the issuance of an ,.;:;r$sment against the taxpayer (see Tolentino u. The Secretary of l,'trtunce, et al., supra), 1','rrr'"
r
r
C. Freedom ofSpeech and ofthe Press - Sec.4, Art. III of ttr,' (lonstitution provides: "No law shall be passed abridging the l r.cdom of speech, of expression, or of the press, or the right of the ,,', rple peaceably to assemble and petition the government for redress 1
,,1
grievances."
,,f
The focal question now arises: When is a tax said, to be violatiue stress freedom or freedom of thought and expression?
To epitomize, the Supreme Couq! held in its decision on the '''l'otentiio E-VAT" ,uprr, thafihere isjurlailgsnj of press "uru, lrcedom and freedom ofthought and expression ifa tax is levied in ,rrd€r to suppress this basic right of the people under the ( lonstitution. Along with other issues in that case, the constitutionality of the l,lxpand.ed Value-Added Tax (E-VAT) under R.A. 7716 was assailed.
'l'he Court, however, citing American cases upheld the E-YAT's vrr [it*ity. The court differentiated the disputed E-VAT f,rom the tax ltrat was levied in the case of Grosiean u. Americun Press Co. (2$7 tl.S. 233; 80 n . Ed. 660 [1936]), where the discriminatory character 73
I,AW OF I]ASIC 1'AXA'I'I()N
of the tax was considered as an abritlgcrncnt of the freedom of the press and of expression. Acting on the premise that, like others, u newspaper publisher must pay equitable and non-discriminatory taxes on his business (citing Associated Press u. NLRB, 301 U.S. 103, 132, 81 L. Ed. 953, 1961 [193U), the Court pointed out that in the Grosjean case, supro, the law imposed a license equivalent to 2o/o of the gross receipts derived from advertisements only on newspapers with a circulation of more than 20,000 copies per week. Because the tax was not based on the volume of advertisement alone, but was measured by the extent of its circulation as well, the law applied only to the thirteen large newspapers in Louisiana, Ieaving untaxed four newspapers with a circulation of only slightly less than 20,000 copies a week and 120 newspapers in question. It was well known that the thirteen newspapers had been critical of Senator Huey Long, and the longdominated legislature of Louisiana responded by taxing what Senator l,ong described as the "lying newspapers" and by imposing on them "a tax on lying." The effect of the tax was to curtail both their revenue and their circulation. As the U.S. Supreme Court noted, the tax was "a deliberate and calculated device in the guise of a tax to limit the circulation of information to which the public is entitled in virtue of the Constitutional guarantees" (297 U.S. at 250,80 L. Ed. at 669). The case, said the Court, "is a classic illustration of the warning that the power to tax is the power to destroy." Incidentolly, ffie! a busine.ss license be required for the sale or distributian of pri:nted materials like newspapers? Anegative answer is in order. The U.S. Supreme Court, in the case of People u. Korins (38b U.S. 2d 474 W975)) said: "x x x (T)o apply an ordinance requiring a business license to be obtained before a person could sell newspapers in the streets would be to impose a prior restraint on press freedom because a newspaper is not in the same category as a pineapple or a soap powder, or a pair of shoes whose sale may be conditioned on the possession of a business license." Speaking further on the nature of press freedom in relation to taxation, particularly as it refers to license taxes imposed mainly for regulation and taxes, which like the VAT, are imposed purely for revenue purposes, the Court said that the imposition of a Iicense tax is unconstitutional because it lays a prior restraint on said right. The license might apply to the sale of goods but to extend it to the press would of course be unconstitutional (Philippine Airlines, Inc. 74
I,IMITN'I'I()NS ON THtI TAXING I'OWt'IT
IN'I'III' I'IIILIPPINES
r, 'l'h( Secretary of Finance, et al., G.R. 115852, Aug. 25, 1994, citing frlrtrtlo<'k u. Pennsyluania, 319 U.S. 105, 87 L.Ed, 1292, 1943). It, is important to note in this connection that the E-VAT law rll A. 7716) requires the payrnent of the surn of P1,000 (now, F500) ,,,, rr nnual registration fee on all persons subject to the value-added r:rx (Sec. 236[8], 1997 NIRC) WiLl this fee not constitute a restraint on press freedom or, for tltttl matter, the freedom of worship? 'l'lre Court, again in the "Tolentino E-VAT'case, ruled in the rr,,11rrt,ive. According to the Court, this fee is not imposed for the ,.r,,rt:ise of a privilege but only for the purpose of defraying part of llrt t:ost of registration. It is, thus, a mere administrative fee, one rrul, irnposed on the exercise of a privilege, much less a constitutional r r1,lrt,.
D. Non-Infrihgement of Religious Freedom - Sec.
5,
\rt. tII of rhe Constitution provides that "(n)o law shall be made r,'specting an establishment of religion or prohibiting the free religious ',r('rcise thereof. The free exercise and enjoyment of preference shall 1'rol'ession and worship without discrimination or lur'cVer be aliowed. No religious test shall be required for the exercise ,,1' t:ivil or political rights." In the case of American Bible Society u. City of Manila (101 Phil" .ttl(;), the Supreme Court ruled that a municipal license tax on the ,rrrlo of bibles and religious articles by a non-stock, non-profit ,,rrssionary organization at a little profit constitutes a curtailment ,,1 religious freedom and worship which is guaranteed by the ( '()nstitution. The Court heid that an ordinance of the City of Manila, ,vlrich imposed a license fee on those engaged in the business of li,.ncral merchandise could not be applied to the appellant's sale of l,rlrles and other religious literature. The Court relied on Murdock r, ['ennsyluania, ante, in which it was held that as a license fee is I'r xccl in amount and unrelated to the receipts of the taxpayer, the Irr:r:nse fee when applied to a religious sect was actually being rrrrltosed as a condition for the exercise of the sect's right under the ( lonstitution. For that reason, it was held that the license fee "r.ostrains in advance those constitutional liberties of press and rt'ligion, and inevitably tends to suppress their exercise" x x x" What the Court has ruied regarding press freedom, as earlier ,lrscussed, could very well be applied also to reiigious freedom" As rr lrt,ly stated by the Court in the "Tolentino E'VAT" case: 75
I,I
I,AW OT IJASIC'I'NXN'I'ION IN'I'I IId I'IIILIIJI'INI1)S
"What has been said above also disposes of the allegations of the PBS that the publication or importation of books and
religious articles, as well as their printing and publication, likewise violates freedom ofthought and conscience. For as the U.S. Supreme Court unanimously held in Jimmy Swaggart Ministries u. Boqrd of Equalization, the Free Exercise of Religion Clause does not prohibit imposing a generally applicable sales and use tax on the sale of religious materials by a religious organization." Note, however, that as in press freedom, a Iicense tax would constitute a restraint on the freedom of worship as guaranteed in the Constitution. In the Philippine Airlines case, the Supreme Court ruled that the application of a license tax to religious groups, such as the Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets, is unconstitutional. According to the Court: "As the U.S. Supreme Court put it, it is one thing to impose a tax on income or property of a preacher. It is quite another thing to exact a tax on him for delivering a sermon." Obviously, in conjunction with this constitutional limitation, Sec. 26(e) and (g) (now, Sec. 30[E] and [G] of the 1997 Tax Code), exempts from the income on non-stock corporation organized and operated exclusively for religious, charitable, scientific, athletic or cultural and social welfare purposes, no part of the income of which inures to the benefit of any member, organizer or any specific person. However, notwithstanding said exemption, the income of such organizations from any activity conducted for profit or from any of their property, real or personal, regardless of the disposition made of such income, is subject to tax under the Tax Code. In connection with the above-cited codal provision regarding the taxabiiity of listed organizations under Sec.26 (now, Sec. 30, 1997 NIRC), on their income from activity conducted for profit, or from any of their property, real or personal, regardless of the disposition made of such income, the Secretary of Justice, in his Opinion. No. 45, dated March lA, 1958 (cited in the cases of Union Chwrch of Manila, Manila Polo Club, CTA Case No. 293, Aug. 31, 1959;Xauier School, Inc., CTA Case No" 1682; Congregaci,an de la Mission de Sqn Vicente d,e Paul, CTA Case No. 1486, Act. 14, 1968), opined that considering the history of the provision in question, it would seem that the statute as now amended. has restricted the tax exempti"on of religious and other organizations therein specified only to the extent of withdrawing the exernption with respect to the income 76
MI'IA'I'I()NS ON'I'I{I''|AXING I'OWER
rr';rlizcd from (a) the productive use of their properties, real or g,,,rsor)al, e.g., rents, dividends or interest; and, (b) from profitable lrrrsincss pursuits, which properties or businesses are not essential lo or necessarily connected with their religious, charitable or ,,rlrrr:i.rtional purposes, as the case may be.
'l'hus, in an isolated sale of a church lot being used for reiigious the proceeds or net income of which was used to buy ;rrrother lot, as a new site to build a church, income from the 1r'rrnsaction was considered merely incidental to its religious t)rrrposes. The property was not acquired for speculation or as an rrrvestment to be eventuaily sold primarily for monetary gain. It should be noted that the BIR has consistently ruled that p;rssive investment income such as interest income from Philippine ('rrrrency (now, ony currency) bank deposit and yield or any other rrronetary benefit from deposit substitutes, trust funds and similar ;u'rangements of religious corporations and.other organizations ,,rrumerated in Sec. 26 (now, Sec. 30 of the 1997 Tax Code), are subject to 2O%a final withholding tax imposed under Sec. 2a(B)(1) of the same t)rrrposes,
(
lode.
Norr-Impairment of Contracts - Sec. 10, Art. III of the lonstitution provides that "(n)o Iaw impairing the obligations of contracts shall be passed." The nature of this limitation is aptly
fn.
(
,l rscussed. as
follows:
t=& ,-p"t" tr t" w""tqdto
im-p;irilEi6ii[alion
to deprive of strength. Hence,
of a contract is to alter or change the
terms or effect of the contract, and thus in contemplation of law, to weaken the position or rights of one or all of the parties to it. A law, which changes the terms of the contract by making new conditions, or changing those in the contract, or dispenses with those expressed impairs its obligations. It is not important that the impairment is but slight, if it exists at all, if there is any impairment, the provision of the Constitution is violated and the courts will interfere. x x x" (Matic, Taxatiotl in the Philippines, Vol. I, p. 62, citing Watson on the Constitution of the U.5., pp. 797-798). Along this rule, it was held in the case of. Casanoua u. Hord (B Phil. 125) that where a mining concession was granted under a ll,oyal Decree and where it appears that under said decree no other l.axes except those mentioned therein shall be imposed on mining and metallurgical industries, the levy of a tax on said mining claim plus an qd ualorem tax on mineral output under a subsequent law lt
l,nW Ol,' IIASI()'l'AXA'l'lON lN'l'll
l,)
(Act 1189) constitute an impairrnent ol'contract because a mining concession is a contract. 44ru non-impairment rule does not apply to public utility frdnchises. According to Sec. 11, Art. XII of the Constitution, no public utility franchise or right shall be granted except under the condition that it shall be subject to amendment, alteration or repeal by the Congress when the common good so requires. Accordingly, in the case of Cagayan Electric Power & Light Co., Inc. u. Comm,issioner of Internal Reuenue (G.R. No. 60126, Sept. 25, 1985), the Supreme Court ruled that non-impairment may not be invoked in the case of a public utility franchise grantee. This is so because under Sec. 8, Art. XIV of the 1935 Constitution and Sec. 5, Art. XIV of the 1973 Constitution (now, Sec. 11, Art. XII, 1987 Constitution), the legislature can impair a grantee's franchise since a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires. In said case, the validity of the removal of the grantee's exemption from income tax, which was provided for in its franchise, was upheld by the Court. The same ruling was also made in the case of Radia Communications of the Phils., In"c. (ltCPI) u. Commissioner of Internal Reuenue (G.R. No. 60547, July 1, 1985 [Resolution]), where the Court held that in the revocation of a franchise grhntee's income tax exemption, there is no question as to the public interest involved inasmuch as the country needs increased revenues. The nature and extent of the legislative power to alter or amend public a utiLity franchise is succinctly explained by the Supreme Court in thf"iotentino E-VA?"case, supra, as follows: "It is }iilE6l"olte d that amendment of petitioner's franchise may only be made by special law in view of $ 24 of P.D. No. 1590 (N..B.; PAL's franchise exempts it from all taxes, except corporate income tax or 2%o tax on gross receipts), which provides: 'This franchise, as amended, or any section or provision hereof may only be modified, amended or repealed expressly by a special law or decree that shall specifically modify, amend, or repeal this franchise or any section or provision thereof.'
"This provision is evidently intended to prevent the amendment of the franchise by mere implication resulting from the enactment of a later inconsistent statute, in consideration of the fact that a franchise is a contract which
78
l,tMt'IA'l'toNS 0N THU',I'AXING l'OWhllt
l)tltLll,l'INUS
cun be altered only by consent of the parties. Thus, in Manila Ilailroad Co. u. Rafferty (40 Phil. 224 [19191), it was held
that an Act of the U.S. Congress which provided for the
payment of tax on certain goods and articles imported into Lhe Philippines, did not amend the franchise of plaintiff, which exempted it from all taxes except those mentioned in its franchise. It was held that a special law cannot be amended by a general law. "In contrast, in the case at bar, Republic Act No. 7716 expressly amends PAL's franchise (P.D. No. 1590) by specifically exempting from the grant of exemptions from the VAT PAL's exemption under P.D. No. 1590. This is within the power of Congress to do under Art. XIII, $ 11 of the Constitution, which provides that the grant of a franchise for the operation of a public utility is subject to amendment, alteration or repeal by Congress when the common good so requires." In the "Tolentino E-VAT" case, su,prct,, one of the petitioners was t lrc Chamber of Real Estate and Builders A-ssociation, Inc. (CREBA). t )rro issue that was raised was whether the imposition of the VAT ,,rr sales and leases ofreal estate by virtue ofcontracts entered into 1,r'ior to the effectivity of the Iaw would violate the non-impairment ,,1'r:ontracts rule in the Constitution. In resolving the issue in favor ,,1't,he VAT, the Court said: "x x x It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter t,he exercise of the taxing power of the State. For not only rure existing laws read into contracts in order to fix obligations tus between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the Iegai order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society." ln another case, the Court of Tax Appeals held that the rule on r',,rr-impairment is not disregarded with the imposition of a higher t r r rate on an existing franchise, it appearing that said franchise rv;rs gr&DtBd with the express understanding and upon the condition tlrrrl, it shall be subject to amendment, alteration and repeal (Phil. l'rntr(,r & Deu. Co. u. Commissioner, CTA Co,se No. 1152, Oct. 31, lt)ti[t).
79
I,AW Ot.' IIASIC'I'AXA'I'I0N
IN'I'III'
I'H II,IPPINIJS
I,I M I'I'A'I'I0NS
F. Non-Imprisonment for l)ebt or Non-Payment of Poll
l
Tax - sec. 20, Art. III of the constitution provides that "(n)o person shall be imprisoned for debt or non-payment of a poll tax"' Debt, as covered by the constitutional guarantee, means any Iiability to pay money arising out of a contract, express or implied (Tan Cang u. Stewart, 42 Phil. 809). The prohibition against imp.isonment for debt was brought about by the force of public opirriol which looked with abhorrence on statutes permitting the cruel imprisonment of debtors. The constitution seeks to prevent the use or tnu power of the state to coerce the payment of debts. The control of ihe creditor over the person of his debtor has been abolished on humanitarian considerations. one should not be punished on account of his poverty. Moreover, the Government is not a proper party to private disputes. It is not called upon to render its aid to one-who deems himself aggrieved by imprisoning the other for failure to pay his debts (Ganaway u. Quintin, 42 Phil' 805) A potl tax (or personal or capitation tax) is a tax of a fixed amount on individuals residing within a specified territory, whether citizens or not, without regard to their property or the occupation in which they may be engaged (51 Am. Jur. 660). The residence tax (now, the community tax certificate) is in the nature of a poll tax. The prohibition against imprisonment for non-payment of poll tax is di.t"t"d by a sense of humanity and sympathy for the plight of the poorer elements of the population who cannot even afford to pay iheir ced.uto or poll tax (i.e., community tax certificate) (Vicente G. Siruco, Philippine Political Law, 1L'h Ed.' p- 682).
G. Origin of Appropriation, Revenue and Tariff Bills
VI of the constitution provides that "(a)II appropriation, revenue or tariff bills, bilis authorizing the increase of the public
debt, bills of local application and private bills shall originate exclusively in the House of Representatives but the senate may propose or concur with amendments." With reference to the extent of the Senate's power under this constitutional provision to propose or concur with amendments to revenue bills that should originate from the House of Representatives, the Court, in the "Tolentino E'VAT" case, supro, said:
bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. x x x At this point, what is important to note is that, as a result of the senate action, a distinct bill "x x
x
(A)
rrray be produced. To insist
that
a revenue
statute
- and not
only the bill which initiated the legislative process crrlminating in the enactment of the law - must substantially
the same as the House bill would be to deny the Senate's t)ower not only tr "9nl! tg!"!!_y&aU9?lllsilsJbutAso "to propose amentlments." It would be to violate the .o-"ffiof the two houses of congress, and in fact make the House superior to the Senate." be
H. Uniformity, Equitability and Progressivity of Taxation li'c. 28(1), Art. VI of the Constitution provides: "The rule of taxation ,lrrrll be uniform and equitable. The Congress shall evolve a l' rltirglllp-sYstem of taxation-" Ilniformity in taxation means that aII taxable articles or kinds ,rl lrroperty of the same class shall be taxed at the same rate. It does rr,l, mearr that lands, chattels, securities, income, occupations, lnrrrchises, privileges, necessities and luxuries shall be assessed at tlrc s&rl€ rate. Different articles may be taxed at different amounts g,r'ovided that the rate is uniform on the same class everywhere with ,r ll lreople at aII times. A tax is uniform when it operates with the same force and effect rlr overy place where the subject of it is found (Churchill, et al. u. r'oncepcion, 34 Phil. 969). Consequently, a tax of P2.00 per square rrrr,t,er on all electric signboards all throughout the Philippines ';rrtisfies the requirement of uniformity (Churchill, et a.l. u. t'
r
t
-
sec. 24, Art.
ON'I'Hh]I'AXING IJOWER
rv lr
rr,cepcion, supra,).
Uniformity in taxation is further defined in one case as that in ich the tax levied "operates with the same force and effect in every
where the subject of it is found. Uniformity means that all 1,r'operty belonging to the same class shaII be taxed alike" (( tommissioner of Internal Reuenue u. Lingayen Gulf Electric Power l'rt., Inc., supra). The Supreme Court, in the case of ' Tan u. Del Rosario, Jr., et al. t( l.R. No. 109289, Oct. 3, 1994), had occasion to rule on the question ;rr; to whether or not the "Simplified Net Income Tax System" or the IINITS (R.A. 7496) violated the rule of uniformity in taxation. The pt'Litioner in that case alleged that uniformity was violated because ,rnrler the SNITS, the law, for tax purposes, singled out business proprietors and professionals differently from corporations and l,rrrtnerships. The taxabtre income of individual proprietors of l,rrsinesses and professionals was taxed at rates of frorn 3o/o to 3Oo/o, wlrile that of corporations and partnerships is taxed at the unitary 1,|;rce
81
LAW
I,IMI'I'A'II0NS ON
0t' llASto'l'nxA't'toN rN't'll t, t,tilt,lPPtNES
rate of 35%. The Court ruled that rhe constitutional mandate has not been disregarded. According to the Court, uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated are to be tneated alike both in privileges and liahiiities. In the case of Villanu.er'rz u. City of lloilo, supra, the Court held that a local tax on tenerue,nt houses does not violate the rule of uniformity and equality of taxation even if the tax in question is not aiso levied on other classes of buildings in the locality where such tax is imposed. And fina[1;,., the Court also ruled that uniformrty is not disregarded if a tax is ievied on admissions to cinema, theaters, vaudeville companies, therrtrical shows and boxing exhibitions but does not tax other places e{'amusernents such as race tracks, cockpit,s, cabarets, concert halls, circuses and other places of amusernent (Eastern Theatrical Co., Inr:" u. Alf,tnso, etc., et al., 83 Phil. 852). Uniformity in taxation, r"hich means geographical unif,ormity only, is also underscored. ir: fhe realm of local taxation. In Art. 218 of the RuIes and Regulations Implementing the Local Government Code, it is mentioned that; "'uhe uniformity required (in local taxatior:)
supra).
TAXING POWI'R
to'evolve a progressive system of taxation.' This is a rlrrt,ctive to Congress, just like the directive to give priority t, t,he enactment of laws for the enhancement of human rlrgnity and the reduction of social, economic and political rrrr,tlualities'(Art. XIII, $1), or the promotion of the right to ',lrrality education' (Art. XIV, $1). These provisions are put r rr Lhe Constitution as moral incentives to legislation, not as I rrtl icially enforceable rights." rlrr is
'l'lrr: Supreme Court has more to say on the question of rr.1,r.r.ssivit! in taxation particularly as it relates to the VAT. The t ', rr rl said: "The Constitution does not really prohibit the imposition ol" indirect taxes which, Iike the VAT, are regressive. What l, simply provides is that Congress shall 'euolue a progressive system of taxation.' x x x Indeed, the mandate to Congress r; not to prescribe, but to evolve a progressive tax system. ( )t,herwise, sales taxes, which perhaps are the oldest form of rndirect taxes, would have been prohibited with the lrroclamation of Art. VIII, $17(1) of the 1973 Constitution, l'rorn which the present Art. VI, $28(1) was taken. Sales taxes ,
r
rrre also regressive.
is only'within the territorial jurisdiction of a province, cify,
municipality or barangay." Taxation is said to be equitable when .its burden fails on those better ai:le to pay (Reyes, et al. u. Almanzor, et al., supra). Progressiuity of taxati,on. is also mandated in the Constitulion. Our income tax systenl is one goud example of such progressivit.y because it is buiit on the principle of the taxpayer's ability to pay. Taxation is progressive when its rate goes up depending *n Ll:e resources of the person afl'ected (Reyes, et al. u. Almanzor, el ul.,
THTT
"Resort to indirect taxes should be minimized but not lvoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayer's ability to pay. x x x" (Philippine Airlines, Inc. u. Secretary of'Finuruce, et at., G.R. No. 115852, Oct. 30, 1995 [Resolution]).
I. Delegation of Legislative Authority to Fix Tariff Rates, lrrrport and Export Quotas' etc. - Sec' 28(2), Art. VI of the (',rrstitution provides that "(t)he Congress may, by law, authorize tlrc President to fix within specified limits, and subject to such lrrnitations and restrictions as it may impose, tariff rates, import
Incidentally, the Supreme Court in the celebrated "Tolen,tino E-VAT" case, supra., declined to rule on the constitutionality of lhe Expanded Value-Added 'Iax Law (R.A. 77L6) for lack of any "empirical" or factual data with regard to uniformity, equality arud progressivity of taxation. Howevern the Court elaborated further on the concept of progressivity as mandated in Sec. 28(1), Art. VI of the Constitution, as may be gleaned from an excerpt of its decision in the followrng paragraph: "Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to
,l'Lhe Government." It has been held that the President may increase tariff rates as ;rrrthorized by law even for revenue purposes only. Sec' 28(2), r\ rt. VI of the Constitution expressly grants permission to Congress ro authorize the President "to fix within specified limits and subject io such limitations and restrictions as it may impose, tariff rates i x x and other duties or imposts x x x." Customs duties which are ,,,rsessed at the prescribed tariff rates are very much like taxes which
82
8tl
:r r
rrd export quotas, tonnage and wharfage dues, and other duties or r prosts, within the framework of the national development program
r r
fl1711
;, I,AW OI.' BASIC'I'AXA'II0N IN 1'HE PHILIPPINDS
LIMI'I'A'I'I()NS ON THT] TAXING POWER
are imposed for both revenue-r&ising and regulatory purposes (Garciau. Executiue Secretary, et al., G.R. No. l0lZTS, July S, 1gg2).
orgunization, trust or philanthropic organization and/or roscarch institution or organization, incorporated as a rronstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students'fees or gifts, donations, subsidies or other lirrms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation." On this score, in Commissioner of Internal Reuenue u. Court of .|1'1teuls, et al. (G.R. No. 115349, Apr. 18, 1997), the Supreme Court, ,vlrrlc sustaining the cancellation of the deficiency contractor's tax ,r,,:rr.ssment against therein private respondent Ateneo de Manila llrriversity, acknowledged that "x x x the Court of Tax Appeals rr.r'rrrately and correctly declared that the 'funds receiued by Ateneo ,1,. Muruila Uniuersity are technically not a fee. They may however lrrll as gifts or donations which are tax-exempt' as shown by private , ,,r;lrondent's compliance with the requirement of Section 123 of the l.lrrl,ional Internal Revenue Code 1now, Sec. 101(A)(3), 1997 NIRCI l,roviding for the exemption of such gifts to an educational
J. Tax Exemption of Properties Actually, Directly and Exclusively Used for Religious, Charitable and Educational Purposes - Sec. 28(3), Art. VI, of the Constitution provides: "Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." To what kind of tax does this exemption apply? In the case of. Lladoc u. Commissioner of Internal Reuenue, et ol, (L-19201, June 16, 1965), wherein petitioner assailed the donor,s and donee's gift taxes on the cash donation for the church building, the supreme court ruled that the abovementioned constitutionar provision which grants tax exemption applies only to property or realty taxes assessed on such properties used directly, actually and exclusively for religious, charitable and educational purposes. It would seemr however, that under existing law, gifts made in favor of religious, charitable or educational organizations would nevertheless qualify for donor's gift tax exemption in light of the provisions of Sec. 94(a) (now, Sec. 101[A]ISJ, 1ggf NIRC)which reads, as follows: "Sec. 101. Exemption of Certain Gifts. - The following gifts or donations shall be exempt from the tax provided for in this Chapter: "(A) In the Case of Gifts Made by a Resident. -
xxxx
"(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization: Prouided, howeuer, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of this exemption, a'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, is a school, college or university and/or charitable corporation, accredited nongovernment
\
84
,
rr
u;t.itution."
'fhe same tax exemption privilege is also granted to donations by a nonresident who is not a citizen of the Philippines 1:;,'c. 94[b][2],'now, Sec. 101[B][2], 1997 NIRC). To be entitled to tax exemption under the Constitution, is proof ,,f trctual use for the tax-exempt purpose necessary? In the case of Prouince of Abra u. Hernando, etc., et al. (L-49336, Arrg. 31, 1981), the Supreme Court ruled that actual use is necessary. ,\r:cording to the Court, to be exempt under the 1973 Constitution, lrrnds, buildings and improvements of religious and charitable rrrstitutions must not only be exclusively but also actually and ,lrrectly used for religious and charitable purposes. This is the ,,r;rrle
,liff'erence between the 1973 Constitution and the 1935 Charter which rcryuires only that the property be exclusively used for the purposes r
rrdicated.
Hence, in that decided case, the Court ruled that it was not in ;rccordance with the Constitution for the lower court to declare in :rn action for declaratory relief that the properties of the Roman ( )atholic Church in Bangued, Abra were tax-exempt without first ,:onducting a hearing thereon to determine the factual question of :rr:tual use and direct use. It is worthy of note, in this connection, that the 1987 Constitution :rlso employs the berms "actually, direc'iiy and exclusively" to
85
r
LAW O!' I]ASIC TAXA'I'I()N
emphasize the importance of use of the property for tax exemption purposes.
It has been held that the test of exemption from taxation is the use of the property for the purposes mentioned in the Constitution (Abya Valley College, Inc. u. Aquino, etc., et al., L-39086, June 15, f98}, It is important to note also that for purposes of tax exemption,
{'usej/overrides "olqpgrs,bid' such that if property, although actually brrtfed by a religious, charitable or educational institution, is actually ++Ae{=fo" a rp*S5g*mglpg1p_osg, the exemption from tax of said property vanishes. Consequently, in the Abra Valley College case, supra, the ruling that the lease by the school of the lower portion of its school building to a commercial establishment known as the Northern Marketing Corporation, which is not even incidental to the educational functions of such school, is outside the scope of the constitutional grant of tax exemption and is, therefore, subject to real estate tax on a pro rata (one-haifl basis. Incidentally, the second storey of the school building which was used for educational purposes (as residential quarters of the School Director's family) is tax-exempt. For tax exemption purposes, however, the term "exclusively used" is not Iimited to total or absolute use for religious, charitable or educational purposes. If a property is incidentally used for the aforementioned purposes, it is clear from decided cases that tax exemption may still subsist.
Thus, in the case again of Abra Valley College, supra, ttre Supreme Court held that where the main building of an educational institution is used both as classrooms for its high school and coilege students as well as residence of the School Director and his family, the tax exempt character of such property remains despite the fact that it is used as such, as the same may be justified as being only
incidental or complementary to its main or primary purpose of providing education to its students. But, as earlier pointed out, the lower portion of the school building is taxable since its use is unrelated to the school's educational functions. Several parallel rulings may be cited on the question of tax exemption that is granted under this constitutional provision. In
I'
I,IMI'I'A'I'IONS ON 1'[tF]'IAXtNC POWER
IN'fTII] PHII,IPPINES
o1. the parish priest as well as tlr,. i,rtlging place incidental to religious t'unctions. 'l'lrc phrase "exclusively used for educational purposes" was lrrr tlrt,r clarified in the case of llerrero, et al. u. Quezon City Board ,,/ rri)-(,ssment Appeals (L-15270, Sept. .30, 1961) and Commissianer ,'1 ln.lerna,l Reuenue u. Bishop of the Missionary District of the I'lttltJttrtine Islonds, etc., et al. (L-I94a5, Aug. 31, 1965), to include, r rr) lhe case of a hospital, a school for training nurses, home and lr,r,r ;u)g facilities for interns, resident doctors, superintendents and ,rtlrt.r' rrlerlbers of the hospital staff, recreational facilities, etc. r\ct-'ording;4ir. the decision in said case, the admission of pay rrrr.rrts doe{gg#detract from the charita$9_g"fug-racter of the hospital , rl rr /l of it*Ir{!p are devoted.sxclusively to the m4intenance of the rrr,,iiI u!io+.as a public charity. The fact that the hospital which is a , l,:rrilable institffijl- admits pay patients does not bar it from ,lrrrrnirrg that it is devoted exclusiveiy to benevolent purposes if it r r,t){,itrs that the income derived from pay patients is devoted to the ,nrl)r'ovement of the charity wards which represents almost lrv,r t,hirds of the total bed capacity aside from "out charity" patients \\, l)() come only for consultation.
r,,rr'(l('n devoted to the incidental use
K. Voting Requirement in Connection with the Llgislative Grant of Tax Exemptions - Sec. 28(4), Art. VI of the
'r,rrstitution provides#No law granting any tax g;pmption shall be members of ti:rri!ii;rd without the concurrence of a majority of(rliltt
(
" Ll ***-.-..-
(',,rtHreSS."
F)uppose a law authorizes the refund of a tax already collected ,,r ;ir'rtnts the deduction of certain items of expenses for income tax tru rir()ses. Con,siderin.g that refunds af taxes and deductions partah,e ,f tltc ruatLLre of exemptiorus, is this ttating requirentent applicable'l
It is a settled rule that refunds partake of the nature of ,'xt,mptions (Aguilar u. Commissianer, CA-G.R. No. SP- 16432, illrrr. 30, 1990). Condonation oftaxes already paid or yet unpaid are ;rlr+o in the nature of tax exemptions (Surigao Consolida.ted Mining t'o., Inc. u. Collector of Internal Reuenue, et al., L-14878, Dec. 26, t
e63).
the case of The Roman Catholic Bishop of Nueua Segouia u. Prouincial Board of llocos Norte (51 Phil. 352), the ruling is to the effect that the tax exemption extends to a vegetable garden in an adjacent Iot and another lot formerly used as a cemetery. Exclusive use considers incidental use also. Hence, the exemption of the convent includes not only the Iand occupied by the building but also the adjacent
L. Non-Impairment of the Supreme Court's Jurisdiction irr Tax Cases - The pertinent provisions of the Constitution are: Sec. 2, Art. VIII: "The Congress shall have the power to defrne, prescribe, and apportion thejurisdiction ofthe various
86
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LAW OI.' I}ASI(]'I'AXA'I'I0N
I
N'I'IIIJ PTIII,IPPINI,JS
courts but may not deprive the Supreme Court of its jurisdiction over cases enumerated in Sec. 5 hereof."
xxx Sec. 5, Art. VIII: "The Supreme Court shall have the following powers:
xxx "(2) Review, revise, reverse, modify or affirm on appeal or certiorari as the law or the Rules of Court may provide, final judgments and orders of lower courts in:
xxx "(b) all cases involving the legality of any tax, impost, assessment or toll, or any penalty imposed in relation thereto."
xxx M. Tax Exemption of Revenues and Assets, Including Grants, Endowments, Donations or Contributions to Educational Institutions - Sec. 4(3) and (4), Art. XIV of the Constitution provides:
xxx "(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the
l,lM I'l'A'l'IONS ON'II1l.l TAXING POWER irrlrsr,r:tion (D) of said section. Non-stock and non-profit educational rrr:rlrlrrtions and government educational institutions are exempt lr,rrr income tax under Sec.30(H) and (I), respectively, of the 1997 'l'rr x ( lode. Notwithstanding the provisions for income tax exemption rrrrrlt'r'said Sec. 30 of the Tax Code, the law provides that income of rr' lr rr l,cver kind and character of said organizations from any of their l,r,rlrr,rties, real or personal, or from any of their activities conducted l,,r' lrrofit, regardless of the disposition made of such income, shall 1,,'rrtrbject to tax imposed under the Tax Code. Analyzing the aforequoted provisions, it is c1ear, therefore, that l,r,plietary educational institutions cannot be categorized as tax.rurrpt under the Tax Code, and that their tax-exempt status 1ru;r;runing all the requisites for exemption are present) will have to 1,,'lrrsed only on the Constitution. on the basis of the opinion of the Secretary of Justice (Opinion N,. 130, S. of 1987), the following legal points on the aforequoted ,,rrrstitutional provisions may be considered important: 1. The exemption from taxes and duties granted to "non-stock, rrorr-profit educational institutions with respect to their revenues rrrrrl assets took effect upon the ratification of the Constitution on l|r'lrruary 2, 1987 because the rule that a constitutional provision ,lr.r:laring certain properties as exempt from taxation is seU-executing ,,ntl proprio uigore exempts the property specified and does not, I lrt'refore, need a legislative enactment to put it into effect. I
2. Legislation
is not essential in order to prescribe the
r'('(luirements for exemption such as who would qualify as "non-stock,
reinvestments. "(4) Subject to conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax." It appears, however, that under Sec. 27(B) of the Tax Code of 1997, proprietary educational institutions shall pay a tax of ten percent (10%) of their taxable income, except those covered by
rron-profit" institutions and the meaning of "actually, directly, and ,,xclusively used," as these things can be the subject of executive ,rnd judicial interpretation. The legislature is not, however, precluded from providing for reasonable regulations in the exercise ,rf'the right to exemptions. 3. Tax exemptions, however, of proprietary educational rrrstitutions require prior legislative implementation since the use ,,[' the permissive tetm "rnay" in the provision gives Congress rliscretion to determine whether or not assets and revenues of proprietary educational institutions should likewise enjoy cxemptions from taxes. It is pertinent to add, however, that this particular exemption l,o proprietary educational institutions will apply only after Congress lras laid down the conditions for its enjoyment. In short, the tax r.xemption here is not self-executing.
88
89
corporate existence ofsuch institutions, their assets shaII be disposed of in the manner provided by law.
"Proprietary educational institutions, including those cooperatively owned may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on dividends and provisions for
r
I,AW OF BASIC I'AXA'I'I()N IN 1'[tI.] PIIILIPPIN!]S
4. All grants, endowments, donations or contributions usetl actually, directly and exclusively for educational purposes are taxexempt where the donee-school is non-stock, non-profit.
xxx The pertinent portion of Sec. ga(a)(3) (now, Sec. t0t[A], lggr NIRC), clearly provides that for purposes of this exernptic,n, a 'non-profit educational andlor charitable corporation, institr.rtion, accredited non-government organization, trust or philanthrr:pic organization and/or research institution or organization' is a schoo), college or university, trust r:r crharit,able corporation, accredited non-government organization, trust or philanthropic organization and/or research institution or organization, incorporated as a non-stock entity, paying no dividends, governed by trustees who receive no compensation, and devoting ail its income, whether students' fees or gifts, donations, subsidies or other forms oi philanthropy, to the accomplishment and promotion of the purpo$es enumerated in its articles of incorporation. It should be noted that in the implementing regulatir:ns, Department of Finance (DOn Order No. 137-82, dated Dec. 16, 1gB?, this point has been emphasized: "1. The exemption herein granted refers to internal revenue taxes and customs duties imposed by the National Government on all revenues and assets of non-stock. non-profit educational institutions."
xxx In a nutshell, the following are some of the highlights ol'tire DOF Order governing the tax exemption of this particular class cf educational institution: 1. The exemption is not only limited to revenues and assets derived from strictly school operations like income from tuition and other miscellaneous fees such as matriculation, library, ROTC, etc., fees, but it also extends to incidental income derived from canteen. bookstore and dormitory facilities. 2. In the case, however, of incidental income, the facilities mentioned must not only be owned and operated by the school itself but such facilities must be located inside the school campus. Canteens operated by mere concessionaires are taxable. 3. Income which is unrelated to school operations 1ike income from bank deposits, trust funds and similar arrangements, royalties, dividends and rental income are taxable. 90
T,IMITA'I'IONS ON THE TAXING POWER
4. The use of the school's income or assets must be in consonance w rt.lr [he purposes for which the school is created; in short, use must 1,,. sc:hool-related, like the grant of scholarships, faculty development, ,',rtrrblishment of professorial chairs, school building expansion, lrlrrrrry and sports facilities, etc. Supposing income from tuition is inuested for an unrelated t'rtrpase like placements in the money market, is the inuested income t,rtuble? The invested income is not taxable, but the earnings ,,.rrlized thereon, Iike interest on the placement, is the one that is rrrxrrble (DOF Order No. 137'87). It may be, however, that further clarification was made by the llrrreau of Internal Revenue (BIR) on the issue of whether or not r r I,grest income of non-stock, non-profit educational institutions from ('rrrrency bank deposits or any monetary benefit from deposit :rrr[stitutes as well as from trust funds and similar arrangements ,, r'l subject to the twenty percent (20%) final withhoiding tax imposed ,rrrtler Sec. 24(e)(1), (now, Sec. 24[B][1], 1997 NIRC) considering the ,,,rrstitutional provision that aII revenues and assets of non-stock ,,,ltrcational institutions used actually, directly and exclusively for ,.rlucational purposes are exempt from taxation' In 1996, the BIR issued a revenue regulation to the effect that r r light of the provision in Sec. 4(3), Art. XIV of the 1987 Constitution, r nlerest income of non-profrt, non-stock educational institutions from l,rrnk deposits shall be exempt from the 2oo/o ftnal withholding tax l,rovided that said income are actually, directly and exclusively used li,r educational purposes, subject to compliance with the conditions sct forth in said regulation. In Comntissioruer of Internal Reuenue u. Court of Appeals, et al. t(l.ll. No. 124043, Oct. 14, 1998), the Supreme Court declared that I lre exemption from payment of income tax under Sec. 4(3), Art. XIV ,,1' the consti.tution may be granted to an educational institution lrrovided that it proves with substantial evidence that (1) it falls rrnd.er the classification as a non'stock, non-profit educational institution; and, (2) the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes. '['he bare allegation that it is a non-stock, non'profit educational institution is insufficient to justify its exemption from the payment oI income tax. As used in the aforesaid constitutional provision, and to debunk t,he claim of therein private respondent YMCA for tax exemption as Irn educational institution thereunder, the supreme court further held that r
r
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T,AW OF BASIC TAXATION
IN l'HT] PHILIPPINES
"x x x The term 'educational institution' or ,institution of learning' has acquired a well-known technical meaning, of which members of the Constitutional Commission are deemed cognizant. Under the Education Act of 1982, such term refers lo schools. The school system is synonymous with
formal education, which 'refers to the hierarchically
structured and chronologically graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to the higher levels. x x x
xxx "Furthermore, under the Education Act of 1g82, even non-formal education is understood to be school-based and private auspices such as foundations and civic-spirited organizations are ruled out. It is settled that the term 'educational institution,' when used in laws granting tax exemption refers to a 'x x x school, seminary, college or educational establishment."'
OTHER CONSTITUTIONAL PROVISIONS RELATED TO
T,IMITA'I'IONS ON THE TAXING POWER ,,rr (lro ground
that the constitutional requirement on the title of a l,rll was not followed. One of the petitioners in that case, the |
'lr
r
lippine Airlines (Philippine Airlines, Inc. u. Secretary of Finance,
, t ,t1., G.R. No. 115852, Aug. 25, 1994), contended that the removal ,,1 rts tax exemption under its franchise, P.D. 1590, is not contained
.it.her House Bill No. 11197 or Senate BiII No. 1630, which finally rrlrrrinated in R.A. 7716. In resolving the issue in favor of the validity of the E-VAT, the ('.rrrt took note of two important things: First, the title of the l,l VAT Law (R.A. 7716)itself speaks of E-VAT's purpose which is to ,'*prrnd the value-added tax system, and one way of doing this, the ('.rrrt said "is to widen its base by withdrawing some of the ,'rr,rnptions granted before," and second, in amending Sec. 103 of tlrt Tax Code, which specifies those transactions which are VA'l'-exempt, the amendment specifically speaks of P.D. 1590, the r''r'.y franchise of PAL, as one of those transactions that no Ionger r.ulr)fs tax exemption. Said provision reads: "Sec. 103. Exempt Transactions - The following shall be exempt from the value-added tax: rrr
,
xxx
TAXATION
1.
Constitutional Requirement on the Subject and Title of Bills - Sec. 26(1), Art. VI of the Constitution provides: "Every bill passed by congress shall embrace only one subject which shall be expressed in the title thereof." In the case of Tan u. Del Rosario, Jr., etc., et al. (G.R. No. 10g2gg, Oct. 3, 1994), the constitutionality of the SNITS, or the ,,Simplified Net Income Tax System" (R.A. 74g6) was assailed on the ground that House Bill No. 343t4, which later became R.A. 24g6, is a "misnomer" since, although the titie speaks of the net income tax, actually what the law levies is the gross income tax, considering the number of disallowed deductions therein as compared to the law existing before its passage. The Court, in upholding the validity of SNITS, ruled that the net income tax system is still retained. under the new law. The number of deductions heretofore allowed may have been significantly reduced. However, this is neither discordant with nor opposed to the net income tax concept, for the fact is, according to the Court, various deductions which are by no means inconsequential continue to be well provided under the new law. In the "Tolentino E-VAT" case, supro, the E-VAT, or the Expanded Value-Added Tax Law (R.A. 7716) was also questioned
"(q) Transactions which are exempt under special laws, except those granted under Presidential Decrees Nos. 66, 529,
972,1497,1590. x x x" The Court said: "x x x To insist that P.D. No. 1590 be mentioned rrr the title of the law, in addition to Section 103 of the NIRC, in n,lrich it is specifically referred to, would be to insist that the title of ,, lrill should be a complete index of its content. x x x" 2. Power of the President to Veto ltems in an. Appropriation, litu€nue, or Tariff Bill - Sec. 27(2), Art. VI of the Constitution 1,r'ovides that: "The President shall have the power to veto any p:rrticular item or items in an appropriation, revenue, or tariff bill lrut the veto shall not affect the item or items to which he does not ,,lrject."
3.
Necessity of an Appropriation Made Before Money May be - Sec. 29(1), Art. VI of the Constitution provides: "No money shall be paid out of the Treasury except in t) rr rsuance of an appropriation made by law." 4. The Prouision Against the Appropriation of Public Money or I'roperty for the Benefit of Any Church, Sect or System of Religion iir'c. 29(2), Art. VI of the Constitution provides: "No public money or lrroperty shall be appropriated, applied, paid or employed, directly l',ri.cl Out of the Treasury
93
I,AW OI' BASTC'I'AXA'[']ON
IN'fI
I
I.]
PIIIT,IPPINI'S
or indirectly for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion or of any priest, preacher, minister, or other religious teacher or dignitary as such except when such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution, or governlnent orphanage or leprosarium." u5.' The Constitutional Prouision. on Taxes Leuied for a Slecial Purpose - Sec.29(3), Art. VI of the Constitution provides: "AIl money collected or any tax levied for a special purposes shall be treated as a special fund and paid out for such purpose only. Ifthe purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government." A good illustration of a special fund under this provision is the OiI Price Stabilization Fund, or OPSF, created under P.D. 1956 to stabilize the prices of imported crude oil. In a decided case, it was
held that where under an executive order of the President (8.O. 1024), this special fund is transferred from the general fund to a "trust liability account," the constitutional mandate is not violated. The OPSF, according to the Court, remains as a special fund subject to COA audit (Osrr-efi,a u. Orbos, etc., et al., G.R. No. 99886, Mar. 31, 1993). fr Allotmeruts to Local Gouernmeruls - Sec. 6, Art. X of the Constitution provides: "Local government units shall have a just share, as determined by law, in the national taxes which shall be autornatically released to them." CASES
CASANOVAS v. HORD,8 PHIL. 125
FACTS: Plaintiff herein was the grantee of a mining ciaim by virtue of a Royal Decree from the Spanish Government, which was issued in 1867. Under the terms of the aforesaid decree, no other taxes except the taxes Ievied therein could be imposed on mining and metallurgical industries. It so happened, however, that afterwards a law (Act 1189) was promulgated which levied a tax on mining claims and an ad ualorem tax on mineral outputs. Flaintiff now claims that the law imposing said taxes is void for being an impairment of a contract. Incidentally, the taxes levied under Act 1189 were made to appiy to mining concessions of the plaintiff herein. 94
LIMITA'IIONS ON'I'HE TAXING POWER
llliLD: There was an impairnnent of the contract existing I',,tw('on the plaintiff-concessionaire and the Spanish Government ,,,rr1ir(lering that under said decree no taxes outside of those ,r 'i I lrorized therein could be levied on mining concessions.
vll.l,trGAS v. HIU CHIONG TSAI PAO HO, ET AL., L-29646, N(
)V. 10, 1g7g
I,'ACTS: Ordinanee No. 6537 was enacted by the City of Manila rrr l!)68 prohibiting aliens from being employed or to engage or t,ru t rcipate in any position or occupation or business enumerated r lr, r'r,in whether permanent, bemporary or casual without first ,,.' r1 pi11g an employment permit from the Mayor of Manila and paying ilrr. perfirit fee of f50.00, except aliens employed in the foreign r,,r,,:;ions, members of religious cougregations, etc. Itcspondent Hiu Chiong Tsai Pao Ho sought to have the ordinance ,'rrr,rrlled on the following grounds: (f) that the ordinance violates r1,,, rrrle of uniformity in taxation; (2) that the ordinance violates r1,,. principle against the undue delegation of legislative power; and, r.lt i.[rat it violates the due process and equal protection clauses in r lr,, r lonstitution.
l{ELD: The City Mayor contended that the princip}e of 'r,ri{iirmity of taxation does not apply to the case because the li nance in question is not a revenue measure. The Court, however, lrl that while the first part of the ordinance is regulatory in nature, r Irr, ,reco[d part requiring a fee of F50.00 is a revenue measure. There , , r,,; logic or justification in exacting f50.00 from aliens who have ,
r
l.
'
i,,',,:r cleared for employment. It is obvious that the purpose of the ,,r'ilinance is to raise money under the guise of regulation.
'l'he amount of F50.00 is unreasonable not only because it is ,.'iL:cssive but also because it fails to consider valid substantial I rllirrences in situations among individual aliens required to pay it.
('lrr;rsification should be based on real or substantial differences l,rrving a reasonable relation to the subject of the particular 1,,Iislation. Here, the same amount of P50.00 is being collected l'r' ,r11 every empioyed alien whether casual, permanent, part-time or lrrll-time, or iowly employee or highly paid executive. fhe ordinance is void because it does not lay down any criterion ,rr st,andard to guide the Mayor in the exercise of his discretion. It v rotrates due process and the equal protection rule because requiring :r person before he can be employed to get a permit from the City Nlayor of Manila who may withhoid or refuse it at will is tantamount 95
r
I,I
LAW OT'BASIC TAXATION IN THE PHILIPPINF]S
to denying the basic right of the people of the Philippines to engage in a means of livelihood. Aliens, once admitted in the Philippines, cannot be deprived of life without due process of law and this guarantee includes the means of livelihood.
VERA, ETC., ET AL. v. CUEVAS, ETC., ET AL., L-8B69B-94, MAY 31, 1979 FACTS: This controversy arose from the order of BIR Commissioner Misael P. Vera requiring respondents, all engaged in the manufacture, sale and distribution of filled miik products such as "Darigold," "Liberty" and "Dutch Baby," to withdraw from the market all of their filled milk products which do not bear the inscription required by Sec. 169 of the Tax Code within 1b days from receipt of the order, with the warning that failure to comply will result in the institution of court action for violation of the order. Sec. 169, in substance, required that the containers of skimmed milk and all milk from which the fatty part has been removed shall carry the words: "This milk is not suitable for nourishment for infants less than one year of age," or such other equivalent words. The validity of the Commissioner's order was contested.
HELD: Sec. 169 of the Tax Code has been repealed by implication. Sec. 169 was enacted in 1g39 together with Sec. 141 (which imposed a specific tax on skimmed milk) and Sec. 1?7 which penalized the sale of skimmed milk without payment of the specific tax and without the Iegend required by Sec. 1G9. However, Sec. 141 was expressly repealed by Sec. 1 of R.A. 844,
and Sec. 777 by Sec. 1 of R.A. 463. With the express repeal of Secs. 141 and L77, Sec. 169 became a mere declaratory provision without a tax purpose or penal sanction. Filled milk is not similar to skimmed milk. The general clause of Sec. 169 is restricted by the specific term "skimmed milk" under the rule of ejusdem generis, Thus, the use of the term "skimmed milk" in the head note and "condensed skimmed milk" in the text restricts the scope of non-fat milk only to skimmed milk and, therefore, does not include "filled milk," a milk where the fatty part is removed and substituted with refined coconut oil or corn oil. Sec. 169 is being enforced only against respondent, filled milk manufacturers, and not against makers of condensed skimmed milk tike SIMILAC, SMA, BREMIL, etc. which are similarly situated. This is a denial of the equal protection of the law. 96
MI1'A'IIONS ON'IHE TAXING POWER
l'ctitioner BIR Commissioner has no jurisdiction to enforce Sec. I r;1) by virtue of Sec. 3 of the Tax Code which authorizes the BIR "to ;,rvr. effect to and administer the supervisory and police power , ,,rrli:rred to it by this Code or other laws." The enforcement of Sec. It;1) sntails promotion of health and is not connected with any tax necessary in t,rr rl)ose. The BIR can exercise police power only when internal national all llr t,nforcement of its powers of collection of forfeitures, of all r (.v(.1ue taxes, fees and charges, and enforcement l,,.rrrrlties and fines connected therewith. I,lnforcement, however, of Sec. 169 is the exclusive function of t Ir,' l,'ood and Drug Administration (now, Bureau of Food and Drugs) rr
rrrler the law.
l'IIOVINCE OF ABRA v. HERNANDO, ETC., ET AL., L-49336, r\tlG. 31, 1981 FACTS: The Roman Catholic Bishop of Abra Province (RCBB)' , lrr irning that the property of the catholic church therein is exempt ,rrrtler the provisions of Sec. 1?, par. 3, Art. VII of the 1973 t'opstitution, filed an action for declaratory relief in the Court of l''rrst Instance of Abra, Branch I, of which respondent Hon. Harold llcrnando is the presiding judge. Without any hearing, however, the trial court adjudged said property as tax-exempt under the aforecited provision. Hence, the r rrsLant petition for certiorari and mandamus by the Province of Abra, ,,'lrresented by the Provincial Assessor, was filed seeking to review I lrr' lower court's decision.
HELD: To be exempt under the Constitution, Iands, buildings improvements of religious and charitable institutions must not ,,rrly be exclusively but also actually and directly used for religious ,rrrd charitable purposes. This is the difference between the 1973 ( bnstitution and the 1935 Constitution, which requires only that tlre property be exclusively used for the purposes indicated. Hence, rl. was error for the trial court to declare said property exempt without rr
Ir rr
rrcl
rst conducting a hearing to determine the factual question of actual nd direct use of the property in question. Moreover, there was a denial of due process to the Province of
Abra when respondent judge made a summary finding of the tax .xempt status of the aforementioned property' The lower court was ordered to hear the case on the merits.
97
f
LAW OF tsASlC ]'AXA1'[ON tN'l,HtJ t,IUl,tpptNtrls
LIMI1'A'I'IONS ON'IHItr TAXING POWER
N.B.: The abovecited case involved an application of thc provisions of sec. 17(3), Art. vIII of the 1g78 constitution. The pertinent provision now is sec. 28(3), Art. vI of the 1982 constitution. Both of these provisions require that property, to be tax-exempt, should be "actually, directly and exclusively used" for religious, charitable and educational purposes.
ll shcruld be noted that in the abovecited CEPALCO case, the | ',rrrt (lispensed with the delinquency surcharge as it appeared that tlr,. ( lrrrrmissioner himself was in doubt as to whether petitioner's
CAGAYAN ELECTRIC POWER & LIGHT CO., INC. v. COMMISSIONER OF INTERNAL REVENUE, G.R. NO.60126, SEPT.25, 1985 FACTS: Petitioner Cagayan Electric Power and Light Co., Inc. (cEPALCo, for short) was granted an electric power franchise und.er R.4.3247 under which it was subject to S% tax on gross receipts ,,in Iieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers and insulators of the grantee, from which taxes and assessments the grantee is hereby expressly exempted." On June 27, 1968, R.A. 5431 took effect making all corporations liable to income tax except those exempt under Sec. 24(c)(1) and Sec.27 (Sec. 26 ofthe Tax Code of tg77). However, on Aug. 4, 1969, petitioner's exemption was restored under R.A. 6020. The question is whether or not petitioner is still exempt on its income between Jan. 1, 1969 (after the effectivity of R.A. 5481) and Aug. 4 of said year when its tax exemption was restored. petitioner invokes non-impairment of contracts.
HELD: The Iegislature can impair petitioner's franchise. The constitution provides that a franchise is subject to amendment, alteration or repeal by the congress when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. S, Art. XIV, lgTJ Corustitutior,,'now, Sec. 11, Art. XII, lgSf Constitution). Also, Sec. 1 of petitioner's franchise (R.A. 3247) subjects the franchise to the Constitution and to Act 3636 (the Model Franchise Act) where sec. 12 states that the franchise is subject to amendment, alteration or repeal. R.A. 5431, subjecting corporations to income tax, has in effect withdrawn the exemption previously enjoyed by petitioner. N.B.: The law governing franchises now is the Uniform Franchise Law (8.O. 72, effectiue Dec. 19, 1gSG) which establishes uniform franchise tax rates of 2o/o fot electric power, water and city gas; SYo for telecommunications like telephone, telegraph, including radio broadcasting (except T\); and bYo for all other franchises. Aside from this, franchise holders now pay income tax. 98
lr rrrrt'lrise was
taxable.
IiAI'ATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN N(l I'ILIPINAS, INC., ET AL. v. COMMISSIONER OF lN'r't,)ttNAL REVENUE, G.R. NO. 81381, JUNE 30, 1988, and r
.rrr1r&niotl cases
ITACTS: There are four petitions assailing the constitutionality ,,1 tlr value-added tax OAT) law, or a tax levied on sellers of goods ,, rrrl scrvices with aggregate gross annual sales exceeding P200,000. \r,\'l' is computed at O% or 10% of the gross selling price of goods or 1, ,,,,,r receipts from sale of services. l'ctitioners contend that the VAT is not within the powers of the 1
I'r,.riident to enact and that
it is regressive,
discriminatory,
,,;rlrrcssivs and violates the due process and equal protection clauses ,rrr,l ol,her provisions of the 1987 Constitution'
IIELD: t) Legislatiue authority of the Presidervt - It is should be noted tlrrr{ Lhe under both the provisions of the "Freedom Constitution" ,,r,rl t,he 198? Constitution, the President is vested with legislative I',,w()rs until a legislature under a new Constitution is convened. I trr, I'irst Congress created and elected under the 1987 Constitution \1 convened on July 27,1987. Hence, the enactment of E-O.273 ^:i rVA'l' [aw) on July 25, 1987, two days before Congress convened on .triy 27,1987, was within the President's constitutional power and ir rr I lrority to Iegislate. lt) Graue abuse of discretion - This contention is also without ,,r,'r'it. Petitioners have failed to show that E.O' 273 was issued , ,,lrriciously and whimsically or in an arbitrary or despotic manner l,r' passion or personal hostility. It appears that a comprehensive ,t rrrly of the VAT was made before 8.O.273 was issued. In fact the rrr,,r.its of the vAT had been extensively discussed by its framers ,, rrrl other government agencies involved in its implementation even rurrlcr the past administration. c) VAT alteged as being oppressiue, discriminatory, uniust and i t't!ressiue - This assertion is not supported by facts and , rrr:umstances. Petitioners merely rely upon newspaper articles justify n, lrich are actually hearsay and have no evidentiary value. To 99
t I,AW OI.' I}ASIC TAXAI'ION
IN'I'IIIi
PHILIPPINI.,]S
the nullification of a law, there must be a clear and unequivocul breach of the Constitution, not a doubtful and argumentativo implication. The sales tax adopted in E.o. 278 is applied similarry on all goodo and services sold to the public which are not tax-exempt at the constant rate of O% and l0%. d) Alleged discrimination - The vAT does not discriminate unduly against customs brokers with the imposition under sec. 103(r), NIRC of the tax on customs brokers *ho excluded """ from the exemption of professionals under said provision. The distinction of customs brokers from the professionals who are subject to occupation tax under the then Local rax code is based upon material differences in that the activities of customs brokers (Iike those of stock, real estate, and immigration brokers) partake more of a business rather than a profession and are thus subject to the percentage tax under sec. 174 of the NIRC prior to its amendment by E'o. 273 which abolished the percentage tax and replaced it with the vAT. If petitioner association did not protest the classification of customs brokers, then the court sees no reason why it should protest now.
REYES, ET AL. v. ALMANZOR, ET AL., G.B. NOS. 49889-46,
APR.26,
1.991
FACTS: Petitioners are owners of parcels of land in Tondo and and. occupied as dwelling sites by tenants who pay monthly rentals not exceeding?800 in July rozt. On July 74, 1971, R.A. ObBg was passed. prohibiting for one year from its effectivity increases in monthly rental on dwelling units or lands where the rentals do not exceed ?800 per month, buiallowing a 70o/o increase thereafter. The law also suspended Art. rroz of the civil code, thus disailowing ejectment of lessees upon expiration of the period of lease. P.D. 20 later amended R.A. 668g by making absolute the prohibition to increase ngonthly rentars below?800 per
sta' cruz, Manila, which are leased
month.
In 1973, respondent city Assessors of Manila reclassified and reassessed the value of subject properties using the schedule of
market values reviewed by the secretary of Finance, thereby entailing an increase in the corresponding tax rates. petitioners filed a Memorandum of Disagreement with the Board of rax Assessment Appeals averring that the reassessments were excessive, unwarranted, inequitable, confiscatory and unconstitutional since 100
I,IMI'I'ATIONS ON THE'I'AXING POWER
rlr,. tux irnposed greatly exceeded the annual income from the t,r"p,'r't,y- Likewise, it is argued that the income approach rather llrrrrr (,he comparable sales approach should have been used in ,1,.t,.r'rrr ining land values. ll:rrd Board's decision finding the assessments valid was affirmed ,r r I lr :rorre modification by the Central Board of Assessment Appeals r t 'ltr\A).
lll,)l,D: Petition is impressed with merit. The crux of the r.( )vcrsy is in the method used in tax assessment of the properties rrr,lrrt'stion, llrrquestionably, both the comparable sales approach and the ,.{ ,)rn(} approach are generally acceptable methods of appraisal for I rr r rr l,ion purposes. However, it is conceded that the propriety of one ,, , r llrc cither depends on several factors and assessors, in fixing ri,,. v;rlue of the property, must consider all circumstances and , l,.rrrcnts of value and musl exerci.se a prudent discretion in reaching
,
,,rr
,
!rilr'luSiOnS.
I
'['he taxing power has the authority to make a reasonable and ,,,, I r riri. elassification for purposes of taxation but the Government's 'i, I rrrust not be prompted by a spirit of hostility or, at the very least, ,1, ,, r'irnination that finds no support in reason. It suffices then that ll',. lrrws operate equally and uniformly on all persons under siurilar 1u( urrst.ances or thai all persons must be treated in the same ,,r;rnner, the conditions not being different both in the privileges , ,,rrli'rred and the liabilities imposed. r
1,,. ,
Verily, taxes are the lifeblood of the Government and so should ,rllected without unnecessary hindrance. However, such collection
be made in accordance with law as any arbitrariness will .,'ft;rte the very reason for the Government itself. It is, therefore, rrr.r'ciisary to reconcile the apparently conflicting interests of the 'rri.lrorities and the taxpayers so that the real purpose of taxation, *'lrieh is the promotion of the common good, may be achieved. t',rnsequently, it stands to reason that petitioners who are burdened lry f]1p Government by its Rental Freezing Laws (then R"A.6359 ,"rt{ P.tr}.20) under the principle of social justice should not now be 1,,,ualized by the same Government by the imposition of excessive l;rrics petitioners can ill afford and eventualiy result in the f,orfeiture ,,1 I heir properties. ,lrrrrrtrd
1()1
r
LAW O}- BASIC TAXAI'ION IN'I'IIE PHILIPPIN!]S
LIMI'['A'I'IONS ON'fIIE TAXING POWER
GARCIA v. EXECUTIVE SECRETARY, ET AL., G.R.
t,lrereto, the State, in order to promote the general welfare, may rnterfere with personal liberty, with property, and with business rr nd occupations. Thus, persons may be subjected to certain kinds of rostraints and burdens in order to secure the general welfare of the St,ate and to this fundamental aim of the Government, the rights of tlrc individual may be subordinated. The ordinance which regulates t,he location of funeral homes has been adopted as part of r,ornprehensive zoning plans for the orderly development of the area , overed thereunder.
NO. 101273, JULY 3, 1992
HELD: Customs duties which are assessed at the prescribed tariff rates are very much like taxes which are frequentiy imposed for both revenrle-raising and for regulatory purposes. Customs duties which constitute taxes in the sense of exactions the proceeds of which become public funds, have either or both the generation of revenuo and the regulation of economic or social activity as their moving purposes. E.O. 475 and E.O. 478 which it may be conceded to be substantially moved by the desire to generate additional public revenues, are not, for that reason alone, either constitutionally flawed, or legally infirm under Sec. 401 of the Tariff and Customs Code. Petitioner has not successfully overcome the presumptions of constitutionality and legality to which those executive orders are entitled.
OSMENA v. ORBOS, ETC., ET AI-., G"R. NO. 99886, MAR. 31, 1993
HELD: With regard to the alleged undue delegation of legislative power, the Court finds that the provision conferring the authority upon the ERB to impose additional amounts on petroleum products provides a sufficient standard by whieh the authority must be exercised. In addition to the general policy ofthe law to protect the local consumer by stabilizing and subsidizing domestic pump rates. Sec. 8(c) of P.D. 1956 expressly authorizes the ERB to impose additional amounts to augment the resources of the OPSF. MACEDA v. MACARAIG, JR., ETC., ET AL., G.R. NO. 88291, JUNE 8, 1993 (RESOLUTION)
HELD: E.O. 93, as a delegating law, was complete in itself - it set forth the policy to be carried out and it fixed the standard to which the delegate had to conform in the performance of his functions, both qualities having been enunciated in Pelaez us. Auditor General (L-23825, Dec. 24, 1965). PATALINGHUG v. COURT OF APPEAX,S, ET dL., G.R. NO. 104786, JAN. 27, Lg94
HELD: The declaration of the area as a commercial" zone through a municipal ordinance is an exercise of police power to promote the good order a.nd general welfare of the people in the locality. Corollary i02
COMMISSIONER OF INTERNAL REVENUE v. COURT OF 't'Ax APPEALS, ET AL., G.R. NO. 106611, JULY 2l,l9g4 FACTS: Private respondent Citytrust Banking Corporation (Oitytrust) filed a claim for refund on Aug. 26, 1986 with the BIR in llre arnount of P19,971,745 representing the aileged aggregate of lhe excess of its total quarterly payments over actual income tax ,ltre, ptrus carried-over withholding tax payments on government sccurities and rental income, as computed in its final income tax rt:turn for the calendar year ending Dec. 31, 1985' In order to interrupt the running of the prescriptive period, ( iitytrust filed on Aug. 28, 1986, a petition with the CTA for refund ol'its income tax overpayments for the years 1983, 1984 and 1985 Iotaling ?19,971,745. The Solicitor General, in its answer, argued I,lrat a mere averment of net loss does not ipso facto merit a refund, that the amounts claimed were not propertry documented and that I he entitlement to refund, if any, has already prescribed. The case was decided solely on the basis of Citytrust's evidence Irt,:cause no evidence was presented by respondent commission due tl,l the repeated failure of the Tax CreditlRefund Division to transmit { he records of the case and investigation report to the Solicitor ( leneral. The CTA ordered the refund ofthe overpaid taxes for 1984 and 1985, although only for the amounts properly documented, but not liir 1983 on the ground of prescription. The Solicitor General moved l"or reconsideration of said decision contending that Citytrust had rrnpaid deficiency income taxes for 1984 and for ruhich assessment rrotices had been issued. The CTA denied the motion and its decision rvas affirmed by the Court of Appeals. Petitioner elevated the case to the Supreme Court faulting rcspondent appellate court with the grant of the claim for refund rlespite failure of Citytrust to substantiate its claims and the BIR's rCI3
I,AW OI.' I]ASIC'I'AXA'I,ION IN'IHE PHILII'PIN!]S
LII\4ITATIONS ON THE TAXII\IG POWER
findings of income and business tax liabilities which bar such payment.
r,rrly t.hc power of supervision over local governments to the
HELD: The Supreme Court remanded the case to the CTA for further proceedings. The BIR, represerted by petitioner commissioner of Internal Revenue, was denied its day in court by reason of the mistakes and/or negligence of its officiais and employees. Due to unavailability of records from the BIR, the solicitor General, in deference to the tax court, was constrained to submit the case fo, d;;ir; without presenting
any evidence. The aforestated impass6 came about due to the fact that, despite the filing of the aforementioned initiatory petition in crA case No. 4099 with the cTA, the Tax Refund Division of the BIR still continued
to act administratively on the craim for refund p""ui"urry nr"a therein, instead of forwarding the record.s of the case to the crA as ordered. It is a long and firmry settied rule of raw that the Government is not bound by the errors committed by its agents. In the p"rfor*ur." of its governmentar functions, the dtate cannot be estopped by the neglect of its agents and officers. Although trre coreii'-ent may generally be estopped through the affirmative acts orprruii. officers acting within their authority, their negrect o" o*iriio, of public duties-as exemplified in this case wil not and shourd not produce that effect' Nowhere is the aforestated rule more true than in the field of taxation. DRILON, ETC. v. LIM, ET AL., G.R. NO, ttZ4gT,AUG. 4, Ig94 FACTS: On appeal of four oil companies and a taxpayer, the ^ secretary ofJustice, pursuant to sec. 1gT ofthe Locar Government
code of 1991 (LGC), d.eclared ordinance No. T294, Manila Revenue code, nur and void ro" rro**piiance ";h;;;; known with the prescribed procedure for enactment of tax ord.inances and for containing certain provisions contrary to law ;;l;pifi"v. RTC-Manila, on petition for certiorari filed ""d by the revoked the secretary's resolution and sustained city of Manila, th""o"diru".u, holding, inter olia, that the procedurar requirements had been observed and declaring that dec. 1g7, LGC was unconstitutionar because it' vested the secretary of Justice with the power of control over local governments in vioratio, of the policy or-rr.Ju"tonomy mandated by the constitution and the provisions therein vesting as the
104
l'r r,r-ridr:nt.
llliLD: Sec. 187, LGC does not violate Secs. 4 and 5, Art. X of tlr,, ()onstitution and the policy of local autonomy. on the issue of noncompliance with the prescribed procedure in tlr. cnactment of the Manila Revenue Code, the Court ruled that tlrr' lrrocedural requirements have been duly observed: notices were rr.nl. to the interested parties and the minutes of the hearings showed tlrrrt, the proposed and approved ordinances were published in the ri'wspapers. The only exception is the posting of the ordinances as ,r;rproved, but this omission does not affect its validity since its l,rrblication in three newspapers of general circulation wiII satisfy ,lrrc process. 'I'OLENTINO v. SECRETA.RY OF FINANCE, ET AL., G.R" NO. I 16455, AUG. 25, lgg4, and companion cases FACTS: Various suits for prohibition and certiorari were filed ,'lrnllenging the constitutionality of R.A. 7716, ar the Expanded Value-Added Tax Law (E-VAT).
HELD: The value-added tax (VAT) is levied on the sale, barter ()r exchange of goods and properties as weII as on the sale or exchange ,rl'services. It is equivalent to 10% ofthe gross selling price or gross
value in money of goods and properties sold, bartered or exchanged or the gross receipts from the sale or exchange of services. R.A. '/716 seeks to widen the tax base of the existing VAT system ancl onhance its administration by amending the NIRC. In a 10-5 vote, the Supreme Court upheld the vaiidity of R,.A. '7716 on the following grounds: (1) The procedural requirements of the Constitution have been complied with by Congress in the enactment of the statute. (2) Judicial inquiry on whether the formal requirements for the enactment of statutes, beyond those prescribed by the Constitution, have been observed is precluded by the principle of separation of powers. (3) The law does not abridge freedom ofspeech, expression or of the press, nor interfere with the free exercise of religion, nor deny to any of the parties lhe right to an education. (4) In view of the ahrsence of factual foundation of record. clairns that the iaw is regressive, oppressive and confirscatory and that, it 105
t,AW Ol,. I}ASl.,t,AXA,l,loN l N,t,ll t,i l,, l l,lt,l)lNl,lti.
violates vested rights protected u,der the contract clausc ar. prematurely raised and do not justify the grant by writ of prohibition. "io"""o*rive reri.r,
TAN v' DEL Ros-ARIo, JR", BT AL., G.R. CARAG, CABALLES, JAMORA AND SOMERANo. 109289, and iEW"ON'N'TCNS, ET AL. v. DEL RosARro, JR., nic., ET AL.;G;.'N6. rog+ao, jointly decided on OCT. A, tgg4 FACTS: petitioners crairn to be taxpayers the implementation of R.A. 74g6, commonly adversery affected by known as simprifie, Net Income Taxation Scherne (,iSNITS,,). - I" C.R.io. r0gZAs, pertitioners chalrenge the co,stitutionarity of n-a.-iago; Jrra i, c.n. No' 109446, the varidity of serc. 6 of Rev. Reg. No. 2-98 promurgated pursuant to said amenclatr:ry law is assailed.
HELD: The court rejecteri the contention of petitioner in G.R. the title of Fr. No. B4st4,which nu"urnu n.a . v4s6,
ili_l?"]]:lthat
full title reads: "{n Act Adopting the simprified Net Income Taxat'ion scheme for the serf-n*proyua und professionul, er.gug"a in the Practice of rheir Frofession, imending sections 21 and 2g of the National Internar Revenue code, As Amlnded." i;;. worded, the title of the b,r sufficientlv meeis the objecti,r"* or iu.. 26{1), Art. VI of the ConstiLution. The
T'he amendatory law cannot be considered as having adopted a gross i,come, instead of having retained the net i".rn,-'"]r"xation scheme. Limiting alrowabre deJuctions from gross discordant with, nor opposed to, the net incole income is neither ,". .r"""pt.
That R.A, 7496 imposes tax on single proprietorships and professionals differentry from the manner it imposes tax on corporations and partnerships cannot be said to violate the constitutional requirement that taxation sha,l be uniform and equitable. Neither is R.A. 74g6 violatrve of due process. The due
process clause may correctly be invoked. only whei-r tf."."'i" a clear contravention of inherent or constitutional rimitations irJrr" of the tax power. "*u".rr"
on petitioners' contention in G.R. No. 10g446 that pubric i*"pplyi;; SNITS to general professional partnerships [y promulgating sec. 6, Rev. respondents exceeded their rule-making authority
Reg' No. 2-98, the court held that *rio s".. o aid not arierbut merely confirmed sec. 28 of the Tax code as amended by R.A. 7496 on the 106
I,tM I'I'A'I'IONS ON'I'HE TAXING POWER
to all individual income taxpayers r non-compensation income. There is no evident intention in tlr,, l:rw, oithcr before or after the amendatory legislation to place on ,rn unequal footing or in significant variance the income tax t r r.:r t,rnent of professionals who practice their respective professions ,ir,lividually and of those who do it through a general professional
r rlr.r)t. ol'tlcrlr-rctions applicable ,,
r
r ( lrt'i
1,;r
rt,nership.
MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, lNCl. v. DEPARTMENT OF FINANCE SECRETARY' G.R. NO. t08524, NOV. 10, 1994 HELD: The Court did not find merit in petitioner's argument tlurt, RMC No. 47-91 granting exemption to coconut farmers and copra
l,roducers but not to traders and dealers is discriminatory and v rolative of the equal protection clause of the Constitution. There is rrr;rterial or substantial difference between coconut farmers and copra l,roducers, on the one hand, and copra traders and dealers, on the
,rllrer. The former produce and sell copra' the latter merely sell
,.opra. The Constitution does not forbid differential treatment of t)('rsons so long as there'is a reasonable basis for classifying them ,lilTerently.
COLLECTOR OF INTERNAL REVENUE v. COURT OF TAX AI'PEAL, ET AL., G.R. NO. L24043, OCT. 14, 1998 FACTS: Private respondent Young Men's Christian Association ,,Ithe Philippines, Inc. (YMCA) is a non-stock, non-profit institution which conducts various programs and activities that are beneficial t,o the public, especialiy the young people, pursuant to its religious, cducational and charitable objectives. In 1980, private resporldent earned, among others, an income of l*676,829.80 from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and?44,259 from parking fees collected from non-members' On July 2, 1984, the commissioner of Internal Revenue issued an assessment to private respondent, in the total amount of ?415,615.01, including surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. Private respondent formally protested the assessment and, as a supplernent to its basic protest, fiIed a letter dated Oct. 8, 1985. In reply, the Commissioner denied the claims of YMCA" 107
t,Aw ot,, BASt0,t.AxA't,toN tN,t,illd I,iltLII'l'lNt,ls
with the denjal.of its formal protest by the collector of lnternal Revenue, YMCA a p"iitil" ,r liled Mar. 14, 1e8e. The CTA rutiJi" r"""" "urriu* ;;f;;; ;" CTA on that the reasing of private :M.,CA;;;;_rri", holding "r facilities;;J;;; operation of a parking rot are. reasonabrv ""rpo"a*t's incidentar to and ;;;;;;ry for the accomplishment of its objectivls. The tax court thus dismissed the 1980 deficiency fixed, contracto"jrlrra the deficiencv expanded ,"ithh;l;i* irr.o,ne taxes, but sustained ,"r and withhording taxes on wages for the same year. The commissioner erevated the case to the court of Appeals which initia,v decidSd in its favor i"y reinstating the assessment of deficiency fixed' contractor's and irr".omu taxes. However, finding merit in yMCA,s fo" the appellate court reversed itserf and-motion "u"orrrideration, prornulgated the iirst assessed dated sept' 28, 19g5 grantirrg.uiJ-oii"i "u"orutio., bv affirming the crA,s decision in toto. on "iylaca febrzg, ige6,-;; the Commissioner,s motio" fo" i".on*ii"r"rir". l
c;;;;;iffi*:i"nied
HELD: The petition is meritorious" It is a basic rure in taxation that the
factuar findings of the crA, when supported by substantiar appeai unless it is-s-hown that ""ia"".", wilr not be disturbed on said court the appreciation of,facts. In trr" pl".""t committed gross error in the Feb' 16, 1994 decision ,f ;hJa;;t case, the Court found that from this rute. The,tatter ;;;;;;;lied of Appeals did not deviate the law ro the facts as found bv the crA andruled on th""i.;;; raised by the commissioner of Internal Revenue. That it dii ;;;; manner different from that of the crA did not necessar,y imply a reversar of factuar findings nor was it irregular or abnormat. on the crucial issue of whether the rentar income of yMCA on its real estate is subject to tax, ii" irr.t rured that the exemption claimed bv yMCA is expressrv Ji""riJ*"a bv rhe verv wording of the iast paragraph of the; s".-;i-trr*; rr"*, ^dr". ii,' wmcl which rnandates that the income or organizations (such as the YMCA) from anv of their p;;ili;, "r**ot rear or-personar, be subject to the tax imposed by the .rr* C"au. il""r,ruu the ]ast paragraph of said section unequivoca,v uubjects't"i* the rent incoml of the YMCA from its'eal nroperty, the court is duty-bound to abide strictrv by its iiteral rneaning anei to refrain i""* ,u.orting to any convorutei attempt at construction.
iiir
A reading i:f tire last paragraph of Sec. 2? (now, Sec. *,)ineludibly that the
show-s
incoine
f"o*"u"i pr"r*,
of exernpt organizatians,
LIMITATIONS ON THE TAXING POWER
,r, w,,ll trs that arising from any activity it conducts for profit, is r r, r r lt'. 1'he phrase "any of their activities conducted for profit" does r',rt rlualif/ the word "properties." This makes income from the 1,r,,pr,rt,y of the organization taxable, regardless of how that income r'i ,r(,(l - whether for profit or for lofty non-profit purposes. l't'rba legis non est recedendum. The law does not make a ,lr:ilrrrct,ion. The rental i.ncome is taxable regardless of whence such nr( ornr) is derived and how it is used or disposed of. Where the law rl,r.r; not distinguish, neither should the Court. 'l'he exemption granted by Sec. 28(3), Art. VI of the 1987 t',,rrst,itution to charitable institutions pertains only to property Irr rcs, not to income tax. "(W)hat is exempted is not the institution rl,ir.lf x x x; those exempted from real estate taxes are lands, l,rr rltlings, and improvements actuaIIy, directly and exciusively used l,,r' religious, charitable and educational purposes" (Record of the t',,rrstitutional Commission, VoI. 2, p. 90). Neither can YMCA invoke Sec. 4(3), Art. XIV of the fundamental , lrrrrLer to claim exemption from income tax. Private respondent is .xr'rrpt from payment of property tax, but not from income tax on r,'rrtals from its property. To be granted the exemption under the ,rlirrecited provision, YMCA must prove with substantial evidence I lrrrt, (1) it falls under the classification of non-stock, non-profit ,'rlucational institutions; and, (2) the income it seeks to be exempted lr.om taxation is used actually, directly and exclusively for ,'tlucational purposes. However, the Court notes that not a scintilla ,,1'evidence was submitted by private respondent to prove that it rnct said requisites. The bare allegation that it is a non-stock, ,,on-profit educational institution is insufficient to justify the (.xemption from payment of income tax. The Court ruled that YMCA is not an educational institution within the purview of Sec. 4(3), Art. XIV of the Constitution. Under t he Education Act of 1982, such term refers to schools. The school system is synonymous with formal education which "refers to the hierarchically structured and chronologically graded Iearning organized and provided by the formal school system and for which certification is required in order for the learner to progress through t,he grades or move to the higher levels." Furthermore, under the Education Act of 1982, even non-formal education is understood to be school-based and "private auspices such as foundations and civic-spirited organizations" are ruled out. trt is settled that the term "educational institution," when used in Iaws granting tax exemptions, refers to a school, seminary, college r
Ir
108 109
I,IMI'I'A'I'IONS ON TI-IE TAXING POWER
IAW OI I}ASIC TAXATION IN'I'IIF] I'HII,IPPINES
or educational establishment. Therefore, private respondent cannot be deemed one of the educational institutions covered by the constitutional provision under consideration. EXERCISES 1. San Antonio Colleges Foundation, Inc. (SACFI) is a non-stock, non-profit educational institution. SACFI owns a 5-hectare lot one-half of which is used as SACFI's school campus, while the other one-half is vacant. To cope with the increasing operating costs and to upgrade its facilities, SACFI plans to do the following, effective Jan. 1, 1991: (1) rent out to Supermarkets, Inc. the vacant portion of the lot for Pl.0 Miliion a year; (2) increase tuition fee by 6% in accordance with government regulations; and (3) import 30 computers for use in its computer courses. (a) Is SACFI subject to real estate tax on its 5-hectare lot for calendar years 1990 and 1991? Explain. (b) WiIl SACFI be subject to income tax on its renlal income from Supermarkets, Inc.? Explain. (c) If the increase in tuition fee results in a net income from school operation in 1991, will SACFI be subject to income taxes and duties on the importation of the 30 computers? Explain. (1990 Bar) 2. State at least three constitutional limitations on the power to
tax.
(1970 Bar)
3. State at least three inherent limitations on the power to tax. (1970 Bar)
4. X, a private individual, leased his piece of land to a school which is being operated for profit. A building was constructed by the school on the leased property to be used as its library. Is the land subject to the real property tax? Can the school claim exemption from the payment of the permit fees for the construction of the building? State your reasons. (1969 Bar) 5. A law was passed condoning unpaid real property taxes. WiIl this law benefit the taxpayers who have been prompt in paying their taxes? Explain. (1968 Bar) 6. The municipal council of Taal, Batangas passed an ordinance which reads: "An Ordinance Imposing Upon Asis Candy Company or Any Other Person or Entity Operating a Candy Factory Within the Municipality An Annual Tax of f1,000.00." At the time the ordinance was approved, Asis Candy Company was the only candy factory operating in Taal. Is the ordinance valid? (1968 Bar)
110
'/
ljt,ate at least three provisions of our Constitution which have or indirect bearing on taxation. (1965 Bar) tl What is meant by situs of taxation? What determines situs of t ,r r;r l iun? (1973 Bar) ,r rlrrctrL
t) 'fhe City of Manila
passed an ordinance imposing a fee on the
,' of admission tickets to cinematographs, theaters, theatrical ,l,,,ws and boxing exhibitions. Said ordinance, however, did not tax \', r'r()us other kinds of amusement such as race tracks, concert halls, , n.uses, and other places ofamusements. A corporation engaged in tlr,' rrrotion pictures business attacked the validity of the ordinance ,,rr llre ground that it is violative of the principle of uniformity of r;rxrrl,ion enjoined by the Constitution. Decide and briefly explain tlr,, s'lyasens for your decision. (1973 Bar) 10. Pursuant to the Land Reform Program, it was provided by lirr,v t,lrat land bonds issued by the Land Bank in payment for lands 1,r r,
{ x t)r'opriated by the Government may be used by the former landlords
ti, l)iry for their taxes. Subsequently, the privilege was modified by
,'llowing instead a bondholder to borrow money from the
l)i.v()lopment Bank of the Philippines (DBP) by assigning the bond ,,,, ir discounted basis to the latter. Does this constittrte an 'rrrlrrirment of the obligation of contracts? (1974 Bar) I l. Explain briefly the limitation of international comity on the 1rr rw0r of taxation. (1989 Bar) r2. Sec. 28O)(8)(A) (now, Sec. 32tBlt7ltzl) of the Tax Code exempts Ir ,ru tax the interest on foreign loans extended to Philippine debtors l,y I'oreign financing institutions owned, controlled or enjoying r ,,l inancing by foreign governments like the Export-Import Bank of ,l:rgran. Private foreign financing institutions, however, outside the ,rl,rrr:mentioned class do not enjoy the same tax exemption privilege. l:r il not violative of the rule on equal protection, uniformity and ,'rltrality of taxation? State your reasons. 13. Assume that there is a bill pending in Congress, which pr'oposes to levy the VAT on apartment lessors. Assume that you iu.(, one of those who are opposed to the passage of the legislative rrrt.itsur€. What possible objection can you put up in light of the rule ,rl'progressivity of taxation, which is embodied in Sec. 28(1), Art. VI ,,1' t,he Constitution? Explain fully. 14. Discuss the rule of situs of taxation as to (a) the imposition of the estate tax on the property left behind lr.y a non-resident alien decedent abroad.
111
I
LAW Ol,' BASIC'|'AXATION
tN,il-ilt t,l-llt,tpptNlls.
(b) the assessment of incorne tax on the salary earned by u resident citizen in the United States; and (c) the applicabiiity or inapplicability of the principle of ,,mobiliu sequuntur personanL." 15. New Horizons Electric company is a grantee of a franchiso to construct, maintain and operate an electric iight prant in tho Province of Nueva viscaya for a period of twenty-five years. under the terms of the franchise, the company shall pay a franchise tax of 2% annually on its gross receipts which shall be "in lieu of all taxes of whatever kind and nature that may be imposed by any national or local government" for the duration of its franchise. on Dec. 19, 1986, however, E.O. Z2 was promulgated establishing uniform franchise tax rates on all existing franchise guarantees. The BIR assessed the company for income tax on income earned. after the executive order went into effect. Is this not an impairment of the obligation of contracts? Explain your answer.
Chapter I
X ) UBLE
III
TAXATION AND TAX EXEMPTIONS
ll()UBLE TAXATION DEFINED. Doubie taxation is defined ,,1-ll',,*,,rg the same propelty twice when it should be taxed but once. lt lrir:r rrlso been defined Sjtaxing the same person twice by the same ;rri r:rrlrt:Lion over the same thing (Victorias Milling Co. u. Municipality
,,1 l'tctorias, Negros Occidental, L-21183, Sept. 27, 1968). U.S. f ,n r,,prudence describes it a$frpxing the same person twice by the ,,rr,r,, jrrrisdiction for the samdlhing or purpose (Haruey Coal & Coke r',, rt. I)illon, 59 W. Va. 605; 53 S.E. 928, 6 L.R.A. [NS] 628).
N0 PROHIBITION AGAINST DOUBLE TAXATION.
\,,,,r'rling to the Supreme Court in the case of Villanueua u. Citv of tt,,tht (L-26521, Dec. 28, 1968), there is pdconstitutional prohibition rrlirrrnst double taxation in the Philippines. trt is something not l,rv,red, but is nevertheless permissible. Double taxation is not t,,r lritlden by our fundamental law (Pepsi-Cola Bottling Ca. of the t'ltrli.ppines, h,c, u. City of Butu,arl, et al., L-22814, Aug. 28, 1968). tt is interesting to note that the Philippines has not adopted the ,,,yrrrrction against double taxation found in the Constitution of the I I rLed States and in some states of the American Union (Serafica u. l'tt'nsllrey of Ormoc City, et al., L-24813, Apr. 28, 1969). There is, tlrlrefore, definitely no prohibition against double or rnultiple t;rxrrtion in our jurisdiction (Comrnissioner af Internal Reuenue u" Ilrrtoaiian-Philippine Co., L-16315, May 30, 1964). rr
KINDS OF DOUBLE TAXATION. Double taxation is ,rornetimes known as "darplieate" tq4_aliqrr,, Duplicate taxation may
llr,t1irectorindirect.ffidqbordoubIetaxationin
tlro objectionable or prohibited sense (also known as obnoxious) r!rcans that the same property is taxed twice when it shoutd lre taxed ,rrrly once; and that both taxes are imposed on the same property or :rrrl:ject matter for the same purpose, by the same State, Government,
,rr taxing authority within the same jurisdiction or taxing district tlrrring the same taxing period and covering the same kind or r:lraracter of tax (Yi,llanueua u. City o{ Ilaila, supra). Consequently, it has heen hetd that l.h.ere. is no objectionable ,louble taxation if a reaJggate tax as,vfel as a'tenemegLlg$ are imposed on the sarne property because the two impositions are not 112
o2roT
r
[,AW
OIT
I]ASIC TAXATION IN THE PHILIPPINES
of the same kind or character (Ibid..).
\rmdircglguplicate taxalion, which is the opposite of direct double ta x a t i o n, is n o-fregTlff o b j e ct i o n ab I e. Th e fo llow i n g c a se il s I u st ra te the point that in the absence of the elements oflirect duplicato taxation, double impositions levied on a particular subject of taxation may be justified.
- 1. The taxpayer's warehousing business, although carried on in relation to the operation ofits sugar central, is a distirict and separate taxable business. There can be no double taxation where the state merely imposes a tax on every separate and distinct business in which a person is engaged. Moreover, there is no prohibition against double or multiple taxation in this jurisdiction (commissionir of Internal Reuenue u. Ho,waiian-Philippine Co., supra) 2" A license tax may be levied upon a business or occupation although the land or property used in connection therewith is subject to property tax. The state may colect an gdlqg!9t\.won property used in a calling and at the sarne time irfpo;;lG;; tax on that c_alling, the imposition of the latter kind of tax being in no sense a double tax (Villanueua t). City of llailo, supra), Thus, there is no objectionable double (or multiple) taxation if tenements in a city are subject to real estate tax while the business of leasing said property are arso subject to real estate d.earer's tax under the National Internal Revenue code as well as the tenement tax levied by the city. There is nothing inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation, calling or activity by both the state and apolitical subdivision thereof (Villanueua u. City of lloilo, supra; cf. Sec. I0g, lgg| NIRC). 3. Both a tricense fee and a tax may be imposed on the same business or occupation for selling the same articie and this is not in violation of the rules against double taxation (compafi,ia General de Tabacos de Filipinas u. City af Manila, L-l6dtg, iune Zg, 1g6J). 4. where a local tax is levied on the sale or disposar of every bottle or container of liquor or intoxicating beverages and at the same time the business of selling such product is also sub;ect to liquor Iicense annually of P600, there is no doubre taxation since the liquor license constitutes a regulatory measure which is imposed in the exercise of the statet police power (san Miguel Brewery, Inc. u. city of cebu, L-2N12;-F ;b. zo, _ 5" A tax imposed both on the occupation of fishing and on the fishpond itself does not constitute doubre taxation. The subjects of taxabion are different from each r ther (people u. fuIend"aros,
tir\.
97
Phil.
958 [Unrep.J).
l)( )l.l Ill,l,)'l'AXA't'lON
ti
'l'lrrrro is no double taxation if a local ordinance imposes a tax sl,orage of copra where it appears that the finished products r,r:rrrrrlrt:l,ured out of the copra are subject to sales tax (now, VAT) rrr,l,.r l,lrc Tax Code (Procter & Gamble Philippine Man'ufacturing t ,tt t, (). Municipality of Jagna, Prouince of Bohol, L-24265, Dec. 28,
,,rr
I
lr.
l,t,'l))
'/
'l'here is no double taxation involved in a case where a tax of t",, rs imposed under Sec. 249 of the Tax Code for bank reserve ,lr.lrr:ioncy while a penalty of 1/10 of 1% a day is also imposed as a 1,,.rrrr lt,y as a consequence of such reserve deficiency under the Central Ir;rrrk Act (R.A.265) (Republic Bank u. CTA, et al., G.R. /V,,: 62554-55, Sept. 2, 1992). g Double taxation means taxing the same property twice when rr :,lrould be taxed only once. That is, taxing the same person twice l,y llrc same jurisdiction for the same thing. In Afisco Insurance r',,rttorcttiorl, et al. u. Court of Appeals, et al. (G.R. No' 112675, .l rr r 25, 1999), the pool of machinery insurers was held to be a taxable ,.rrt rl,.y distinct from the individual corporate entities of the ceding ,,,rr,pi,rnies. The tax-on its income is different from the ta{-Qbe ,l,r'rrlcnds received-by said comp-6nies, and clearly, no double taxation r
r',
i rrv
olv€d"
MEANS EMPLOYED TO AVOID DOUBLE TAXATION. It that our tax system provides for certain schemes irr .rder to avoid or minimize the harsh or burdensome effects of ,l,,rrble taxation. These tax reliefs or schemes are sometimes ,.rrrlrodied in tg$ trqaties or agrqpnge4]ls with foreign countries while , I I t ,r's are imbedded in statutory proviiions found uider our existing , , ,'rlgnificant to note
r
r
lrrrvli.
lfor example, under Sec. 25(b)(5)(B) of the Tax Code (Cf. ::,','. 28[B][5][b], 1997 NIRC), the burden of double taxation on the ',,rrrre dividend income earned in the Fhilippines by a no:r'resident l.r'1,lgn corporation (one tax in the Philippines and another tax in tlr(. do-dfrilIary country) is reduced by the imposition of the lower ,,,lc of 75% (rn iieu of the 35%) subject "to the condition that the , ,,urrtry in which the non-resident foreign corporation is domiciled foreign 'lrrrll allow a credit against the tax due from the non-resident ,,,'' pr-rra[iffiTEf es-deerrEl-i6-EETe bben p aid in the Ph ili ppi nes ,,,1rrivalent h 2A% which represents the difference between the r,'tlrrlar tax (35%) on corporations and the tax (15o/o) on dividends r x x" (see also Commissianer of Internal Reuenue u. Procter & ritttnhle Philippine Manufacturing Corp., et al., G".8" No. 66838,
!tt't 2, 1991).
114
AND'l'AX EXEMPTIONS
r
I,AW OF I]ASIC I'AXATION IN TIIE PHILIPPINES
DOUI]I,f] TAXATION AND TAX EXEMPTIONS
Most common of these tax reriefs are tax deductions and tax g_ry:lits. To illustrate: In the case of deductidis,-6; ;;;;;i;; ;;; estate tax law (Sec. 79;now,,Sec. S6[A]IZJ, tggT NIRC)p"oula"" fo, the so-called "vanishing deductiin''i in order t" -iiir"I""ilr. b-urdensome gffects of double taxation on the propiiy tfrrt i the subject of two or more transfers pertaining "u-" io two l" _o"
(
too,ooo -It'ro,oi6loiC
i
l"T -2' u: the
decedents.
As to the tax credit set'up, our present law contains a number of tax relief schemes also. For example, for value_added tax (VAT) purposes' the tax on inputs or items that go into the manufacture of finished products (which are eventually sord) may be credited against or deducted from the output tax or tax on the finished proJuct.
In income taxation, too, the credit scheme is present. For instance, in the case of a resident citizen or domestic corporation whose income from sources within a foreign country is arso taxable under Philippine law, the tax paid to such fJreign.o""try*ry, under certain limitations, be claimed as a credit agaiist thu phili;eine tax on the same income (See. SaICJ[S][oJ, tggf NIRC) How is the cred.it for foreign toxes paid ctrriued o1? Assuming the income from a foreign ,orr"* is derived from only one country, the Tax code provides that, "(a) The amount of the .rldit in respect to the tax paid or incurred to any country shall not exceecl the same propgrtiqn of the tax against which such creditlE-I6r6i, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxabre income ro. trr* .u*e ia*aute year; and, (b) The total amount of the credit shari not exceed the sarne proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Fhirippines taxable under this Titre bears to his entire taxable i*coine fbr the sarne taxable year" (Sec 34 tcltAlful and. [b], tggf NIRC). Thus, supposing the taxable income of X Corp., a domestic corporation, from fo'eign country frI is F2,000,000 anel its philippine sourced income is F8,000,000. The foreign incorne tax actually paid is P800,000. The foreign tax credit is coLputed as follows: step 1: To get the maximum allowable foreign tax credit _under Philippine law: Taxable Incorne (Foreign Source)
Philippine Tax
Total Taxable Income (Foreign and Philippine
on the Total Incorne
Sources)
t16
{,iriiit of $'oleign T"'ax
ilr"eelit
)r,
x
?3,500,000
(at
35o/o)
u
fl00,000
To credit foreign tax against FhiLippine tax, deduct the
foreign tax credit (per formula) from the Philippine tax " " 1' ttt llrt) toreign tax actually paid, whichever is lesser. 1
F3,500,000 l'ess: Fq.slgn tax Credit Allowable
700,000 P2,800,000
tax credit method, as a means of *iryr-igg1lggLl" ..I.1"-t".uign Lroll' applies also to resident aliens provided thaffie reciprocity r''(luueme\t law is satisfied and subject to the allocation rule in the jtabhslred in the Tax Code (see Sec.SaIC][3/ and par. [a][A] & ,',,i' /,/'/,tnereofi see also Commissioner of Internal Reuenue u. V.E. t "ttttcRy, et ql., L-tsl69, L-18262 andL-21434, July 13, 1964). In thu however, of non-resident Filipinos, since their "u"", income is subject to two taxes levied under two ']':::'c'-:9\,rced lt ll erent j,rri.di.tions, ' .o-", in the form of a deduction the tax "' '!: tbrelgr national income"uli"f tax from:the foreisn soursed income 'l:""'-,The- tu* credit scheme in this instancJ is(tlol!-Available I Ir xrr
[b], I gfT NIRC). Il.:ho.,ta be noted that under Sec. 23 of the 1997 Tax Code lllul'dtts for the general principles of income taxation in the
1,\,'c. 21
t'rttupprri€s, rr
L'm.sources
a non-resident citizen is taxable only on income derived
within the Philippines. An alien indidividual, whether
;t reslo€rlt of, not of the Philippines, is taxable only on income derived
r|om sources within the Philippines. A foreign corporation, whether t'n$a$€d or not in trade or business in the Philippines, is taxable ')niy on rncome derived from sources within the Philippines. r,h9 bun"rit of credit against income tax for taxes of foreign r"(runrnes shall be allowed to a citizen of the Philippines and a (rornestlc corporation if the taxpayer so signifies in his return; but :;ucn oenefit shall not be allowed to an alien individual and a foreign t:orporatioq Sec. Sa[cJt3]tal and. [b], 1gg7 NIRC).
t\7
r
l,AW
olf
Bn
sl( t ,l,AXA'l'loN lN ,l,il l,l I,lil l,ll,l,lNl,tS
I)OIJtlt,14'l'AxA'l'loN ANII'lAX ITXUMPI'IONS
Among the examples of tax t,r:caties ftrr ro.[ierf'r'rorrr
lt, is ir w0ll settled rule that he who claims exemption should (Visayan Cebu r,r'()vr) by convincing proof thq!*-h"g !p exgmpted L- 19530 & Reuenue, Internal l't'ilni.tlal Co., Inc. u. Commissioner of
li.
of double taxation are the RP_US Tax Treaty ancl or rrvoirrlrrrr,o tho ll.I]:Wur'rt, Germany Tax Treaty which *frit-nc-sutject of compu.utirrr r()vr(,w in C3mylssioner of Internal Reuenue u. S. C. Johnsoi ,ni ion, t,,r., et al. (G.R. No. 12710b, June 2b, 1999).
t
TAX EXEMPTIONS. An exemption frorn taxation may bo defined as a grant of imgrynity, exDress or imglied, to particular i corporations from the obligation to pay taxes (51 Arnt, I
,
Sillilii"
KINDS oF TAx ExEMprIoNS. Immunities from taxation which originate from the constitution are know n as constitutionar exemptions; those which emanate from legisl exemptions. Whenever exemptions u"" "tio" "J€.id.*,oii granted by organic "*p""r"ly or statute law, they are called expL?:!-_g_Lemptions. 'I;pn;; exemptions, however,-exist whenever [Efiicuiai pe"sors-, properties or excises are deemed exempt as they fa, outsiie il;;;" of the taxing provision itself. For example, if a tax is r""i"J* t"nement houses in a particurar rocality but such law is silent as to tho taxabilitv of other-types of dweiling which u"" i., tlu,t locality, it is implied that the ratter aie exempt from"*lrlins said t;,..'ffi exemption connotes absolwe immunity; whiL pqrtial exemption is one where coltection of a pilt of the ,t:1!]9B6nffi1lrln.' PRINCIPLES GOVERNING TAX EXEMPTION 1' Exemptions from taxation are highly disfavored in law, and he who claims an exemption must be abL to hrs claim by the i-r,*iry clearest grant of organic or statute law. a" f"r* trru
common burden cannot be permitted to exist rpo.,",.l"rrilori uugi," i*pir.rtio.r.
(Asiatic Petroreum co. [p.1.], Ltd. u. Lranes, 49 phil. 466 cited in Collector of Internal Reuenue u. Munila Jockey Ctub, Inc,-, gg phil. 670; Dauao Light & power co., Inc. u. comiissiiil, et al', L-28739 & L-28902., Mar. 29, 1gr2). "r'c"ston.S, To epitomize thf principre, . -+"-it is well settled that ,.taxation
gxcgpliorr,'
is the teljlgmption it-tl5 '- ----:--:-Iule'
2. He q,ho claims an exemption from his share of the burden in taxation must justify his crairn uv ,rro*irf common ttut trr" legislature intended to exempt him by words too plain to bI mistaken (surigao consolidated Miiing co., Inc. u. cirtector of internal Reuenue, et al., L-14gfg, Dec. 2b, lS6S).
t9,144, Fe,b. 27, 1965).
4. Tax exemptions must be s!11c-L=b:s1{,-q!-ry-gd such that the ,.xemption wiII n-ot be held to be conferred unless the terms under *hich it is granted clearly and distinctly show that such was the rrrtention of ttt" parties (Philippin'e Acetylene Co', Inc' u' (tomrnissioner of Iniernal Reuenue, L'19707, Aug' 17, 1967; Manila t,)lectric Company u. Vera, etc., L-29987, Oct' 22, 1975; Surigao (:ctnsalid.atei runng Co., Inc. u. Collector of Internal Reuenue, (Lealda Electric r,l, al., supra). Tax exernptions are not presumed 30, 1963)' Apr' r:o., inc.-u. iollector of Internal Reuenue, L'16428, 5. Constitutional grants of tax exemption are glf:exeeuiius' The rcason for this is thai a constitutional provision declaring certain enactment to lrroperties as tax-exempt does not need a legislative that presumption the with irut'it into effect. This is in'consonance provisions of the Constitution are generally self-executing; otherwise, it *itt be within the power of the legislature tq--lgqgte or practically
nullify the directions of the fundamental law (opinion No. S.
1987, SecretarY of Justice).
6. In much the same wav that !q49p ry8l.99='4qLtql -e-4glqgigry are likewise personal. For exarnple, under sec. 282 of the Local 6;;;;;-""t ft"-gnTtfions, exemptions from local Laxes are obtained through the issuance of a Jax exeropl-Lo-rr--cqfJ{igatg -and the ,egulalio.rs provide that the same shall be nof]'tr-a'lferable' ?' Deductions for income tax purposes partake of the nature of the tax exemptions; hence, if tax exemptions are to be strictly construed, then it follows that deductions must also be st-f-tc-llV consBUed.
g. The rule of strict construction of tax exemptions should not, for obvious reasons, be applied to organizations performing strictly religious, charitable and educational functions' on strict It should be noted in this connection that this rulegranted in of exemptions in cases interpretation also does not apply instrumentality or political subdivision favor of a government (Mq.ced.a u. Macaraig, Jr., et al., G'R' No' 88291, May 31' 1991)llke public corporations. 9. A claim of exemption from tax payment" tqq-9! ]9 'Jqqly-plgyq Since a and based on languagl in t-!9-l1y-!9" llain to be mistaken' ust be m t u:r n-a p ;f;tt rt;fm-a'fi iF tFe
effi
"
118
130,
119
I,N W
t
0II t}ASIC'I'AXA'I,ION iN'I,HIi I'IIILIPPINUS
I)OUI]I,t' 1'NXA'IION AND'I'AX UXUMP'TIONS
construed pJrtc_lisp-lttijptls_against the grantee. There is no tax exemption solely on the ground of equity (Dauao Gu,ly Corporation u. Commissioner of Internal Reuenue, et Lumber al., G.R. July ZS, 1998; A"tlas Consolid,ated'Mining and {r. I17359, Deuelopment corporation u. commissioner of tnternal iet)entte, et al., G.-8. No. tI9f86, Sept. 27, tggS). 10. A tax amnesty, much like a tax exemption, is never favorctl or presumed in law and, if granted by a statute, the terms of thc u exemption must be construed-stricttv ::l:::rrl,^T -1li! "f lu,T, jr,__b:.orj!thet";;;;;ti## *_$}iffi ffi ?P\lh::tSllui-"r,ur$,l,4udly The rule on slrictlssimi jurii a application of an amnesty law/decree should be resoived in favor or. the taxing authority(-commissio*er of Inter*al Reuenue ut. court of Appeals, et ql., G.R. No. 17g|f 6, Jon. 20, lggg). Finding petitioner's craim of immunity from prosecution -11' under the shield of availing of a tax amnesty untenabre, the court held that "(h)e did not meet the twin requirements of p.D. 1740 and 1840, i.e', declaration of his untaxed income and full payment of tax due thereon. clearry, the petitioner is not entitled to the benefits of P'D' Nos. 1740 and 1g40. The mere filing of tax *-rru"ty return under P.D. Nos' 1740 and 1g40 does not rpso /ocro shietd hirn from immunity against prosecution. Tax an taxpavers *lthout iaving to *" case. To avail of a tax amnesty granted by the Cou"rn_irrrt, and to be immune from suiton its deiinquencies, rh; ;;p;;1"'_u.t rr"u" voluntarily disclosed his previousiy untaxed income and must have paid the corresponding tax on such previously untaxed income,, (Bafi,as, Jr. u. Court of Appeals, et al., G.R. *o. tOi^6i, iii.- to,
r*affi"tl
2000).
ILLUSTRATIVE SITUATIONS ON TAX EXEMPTIONS 1. The following are examples of existing tax exemptions
classified as to (a) tax on person, (b) tax on property, and (c) tax on exercise or privilege.
(a) Tax on person - The residence tax (now known as community tax) which is a personar tax is not imposed on dipromali. ura.orrr.,r"" representatives as well as transient visitors when their stay in the Philippines does not exceed three (B) months (sei. iig, to"or Gouernment Code). property owned by the Republic of . Q) .!yx on Property the Philippines or any of-Real its poliiicai subdivisi"". p-"iaed the beneficial use thereof is not transferred to t"*iui"-p""ror' charitable institutions, churches, parsonages " or convents 120
,r;r1r.r'l,cnunt thereto, mosques and all lands, buildings and ,,,,t,r()v(rnents actually, directly and exclusively used for religious, , l,,r r rtrrlrle and educational purposes are exempt from tax (Sec. 39[a], I ,,,,r1 (i
LAW ol,' BnSlO,t'AXA,t.lON tN .l'llt,l l,ilU,lt,l)tNIrS
because tax exemptions are strictly construed (8. Rodriguez, Inc. Collector of l*ternal Reuenue, et ai., L-ZS04t, July
lx)LJ
p,
igiil
lrr n Ilase employee of his car inside the Base to another American
10' The exemption from income tax on Base-connected income of non-resident American Base personnel under ttre u.s. gasu" r""uty does not extend to the income realized fiom the sare by an American
irrrtronal (Reagon u. Commissioner of Internal Reuenu.e, L'26379' I t,'r' 27, 1969). t t. Art. XVIII of the Bases Treaty exempts from tax the gross r.r .r1)ts of a Base concessionaire from the business of hauling and t r rr rrsporting of cargoes inside the Base belonging to the U.S. Army (t'ttn,las, et a.l. u. Republic, et ol., 103 Phil. 712). 12. Where an electric iight and power franchise holder (Meralco) r,, r,xempt under its franchise fronn property tax on its poles, wires, tr rrrrsformers and insulators, its exemption does not extend to the , ,,rnpensating tax (now, VAT) on its importation of said articles. Said ,,,rrrpensating tax (now, VAT) is not a property tax but an excise tirx. Exemptions, being highly disfavored in law, must be strictly .rrrstrued (Meralco u. Vera, etc., supro). 13. Where it appears that under a certain law (8.A. 79), atacilag , lub (Manila Jockey Club) is "exempt from the payment of any rrrunicipal or national tax," such exemption does not include ,'xemption from income tax on the rentals received from the lease of rLs race tracks to the Philippine Charity Sweepstakes Office. The sl,atutory exemption covers only taxes in connection with races like t.he municipal license fee of ?600 per day of racing and the ?500 I'ixed tax for each day of racing under Sec. 193, NIBC (now, 30% tax on gross receipts under Sec. 125[e], 1997 NIRC). Tax exemptions are strictly construed (Collector of Internol Reuenue u. Monilo Jockey Club, Inc., 98 Phil. 670). 14. R.A. 1435 allows a partial refund (i.e., tax exemption) of 25o/o of the specific tax paid on fuel oil used in the operations of forest concessionaires. Since tax exemptions are strictly construed, the exemption refers only to the operations of forest concessionaires, and not to oil used in the operation of sawmills (Insular Lumber Cou. CTA, et ol., L-31057, May 29, 1981). 15. In the case of two electric power plants, which are operating in the same locality, it cannot be presumed that the.exemption of one should also be enjoyed by the other' Tax exemptiQns are never presumed (Dauao Light & Power Co. u. Commissioner of Custorns, et al., ante). 16. Inasmuch as under the Bases Treaty only sales of goods "for the exclusive use in the construction, maintenance' oper&tion or defense of the Base," i.e., only sales to the U-S. quartermaster are exempt, it follows that the sale of oxygen and acetylene gases to the VOA (Voice of America) is taxable (Philippine Acetylene Co.,Inc. u. Commissioner of Internal Reoenue, et ol., L'19707, AW. 17, 1967).
122
L23
Jl,
6' The salaries of judicial officers are not tax-exempt and thoir taxability is not
contra-ry to the provisions of sec. 10, Art. vIII of tho constitution on the non-diminution of the salaries of memb.rr of the Judiciary during their continuance in office. The clear intont of the constitutional commission that iramed the constitution rvrr is lJ t, llJ tl:,::_.ltles to ta1 as in the case of uI tu*puy"" (tvirofon, :yi,,-:l " ;;;;i ;i, li.,?!, 23, ! ; 1987yfResatution]). ::' * n e r . o f r nt e r n at R e u e n u ", " t ii.',' 8."i.' i;." July 7' The exemption of the contractee (wo4d Hearth organization) from ail "indirect taxes" as provided in the Host Agreeor"'rrt u"t*""n the Republic of the philippines and wHo shoura tel-pi"-".rt"a to mean that the entity or person exempt is the itself who constructed the buildiag owned by the contractee "orrt"u.i-o" (commissioner of Internal Reuenue u. John Gotaico s, s;;;-i;i.',"i""i.,"t-sI0gz, Feb' 27, lgsr). This does not viorate the ruie that tax exemptions are personal because the manifest intention of the ug";-"rrt, o, stated earlier, is to exempt the contractor so that no contractor,s tax may be shifted to the contractee WHO. 8' A.tax exemption in the manufacture and. sare of machineries ^ making cigarette paper for does not incrude the manufacture and sale of the products produced bv the machine Erugineering Corp. u. CTA, et it., t _iZeOS Nr;i;;-M;tchanicar and L-2TgSg, June J0, 1987
r::
I e75).
9' In the contract c_ove:ing the construction of the Mactan Airport (the contractor was p.J. Kiener & co. Ltd.),'revied it *a" piouiJ"l-tn"t ,,rro tax of anv kind or description wilr be ;;;-;"teriar, equipment or supplies which may be purchased o. ott u.qri""a in connection with the project .r.rd"" the contr&ct.,, "i*i.u Does this exemption include the-tax on the petroreum pr:oaiii, uJ"a ro th" project? The court ruled in the negative. The court said that the
itels are those malerials o" .,rpfii". ,ihi"h 31! u"" -*ortar, rncorporated,elempt in the construction of the airfierd ,r "r"h i"r,i.r, p"oJ""t.
cement, sand, bricks, etc., but not the petrole"* not materials or supplies since they do go
""u not or are consumed in the construction of the project b.,i-r"" usedinto in the machineries and equipment (cammiss{oner of Internar Reuenue u. p.J. Kiener Ca., Ltd., et al., L-24f54, July lS, tifb.
I
, r t,r
llt,lt'l'AxA'l'l()N AND'l'AX !;XEMI'}TIONS
rrlrw (rt,. trnslO,l.AXA,l,lON lN,l,lil.: lrllll,llrplNl.;S are strictlv construed. Th-erefore, if what thr vAr) ss".. e c. rreo e 0 (no w, sec. r,; tr,un ;, i;; ;;' iE "","in )iZ; b,"ffl ""au" and/or cargo,' vessers, ;'h;;1ii;'b;;;i,iuru-rot within the exemption because tugboatsri" nJt .r"*a for carryingthe scope of passengerl or cargo but onlv for towing ,rt (Lu-"on S;r"-aiioe u. CTA, et at., L_J0z3z, corp, "i ""rr"il" a,owing tax exemptiou a re co nstru ed sr ri,iss j i m i u r is c
,rJ';J"T;ff?I"'il"" r;;; s;;-;#Ti""):l:::.* '.i11i*,i ;;
"J,l*:"l[:l
nt1'.ii,"iig;;:;*. f ii r.r^* o u, ^i i " r ri-i;;; ;;;-,R j;;;r;1, " " u
Yfi[i:;;;;"'.::t:',;!,ti,iiii{ili;;6{,iiili! TAX-E*EMPT PERsoNs RE',TRED To KEE,
Boors or
t:,:-:"',H';*n.l,yii:;";:""Tji'sratusa*,",,l,stirythe ,*r ,""I*"?Ji, provision of "r s!;, ffi ,;i;:"i",.tLTol. r"":llffi lXT,tjli existing
g";"ui
;r-speciar r;-* i" ii" contrary notwithstanding, ttre u'oo'ts or;;.;;;. and other pertinent records of tax-exempt organizati"rr g"r"tees of t-ax incentives shall be subJect to examination "" by trr"'g;r""u of Internar Revenue for
ff#ffi ""[::iTnT,'Jr-,TIJj:ffi ,]itr,tr,u*"Tr',r*,"laerwhich Is or tex incentives, tax liability, if
s'
u
oi
-
r'nr."
and their
TAX AVOTDANCE; TAX EVAS.TpN; TAX FRAUD. ,s n,,is-rh e m i n i m i z i t i r r r t - ii* Tar u, i t i h ro u gh -il.;anau re ga l m e-a ns. " means used to *i"i*ir" -t ,u*u, u""".,r.egar,-ii ,o,
Ii:,:i:"
Tax avoidar."
U" illustrated, as follows: Suppose that A,s income frorn his oroperty 11v, reaches th" ,nu*i*um rate under the raw. To avoid this, he
aon"t"r;;;:ilr';"hi.
to ,, institution that ouarifi"; i;;r* ""."t, "ir.ational ,rrJ"" Art. xrv or the'consitt;;;";i#,aonu" i'rrire". rrsl, "-",ortion
;;t"; i".tiiulior'*rr"l income ".iJr,-"to"r., and assets are Having thus transferred"*.ruri;;i;';; for educationar purposes. said ;r;; dii".""ro"", succeeds in avoiding pavment of the tax 9n.the i".r-" i"riuua tn"r"r" o^. uii-ioout the donor's tox? rs A tiabte-tieffi;iH,i a*"rrilr"J?o.0", donor's tax on the donated "r,, Ibr exemption under S"".'g
concur: ( 1) Donee instituiio" Tax i. ,'".r,r"r, ""ii"*,J "?,-lnir,"".ity; dividends: (3) It is governed3.r"r:;;*k, ion_profit enrity paying no uy tru"t"us who receive no compensation;
(2)
It is incorporarea ,,
124
DOUBLE TAXATION AND TAX EXEMPTIONS
tlr /\ll
il,s income, whether students'fees or gifts, donations or
arl,,rrrlrr.s are devoted to the accomplishment and promotion of the
l,rr r,():r(,s enupe.rated in its articles of incorporation; and, (b[q.t rr,,rr. Lhan @9 of the gift shall be used by the d.onee'-for Brlrrr r rr rsLr&tive purposes.
jurisdiction. According to case, an attempt to minimize one's tax does not r',r r'.r.urily constitute fraud. It is a settled principle that a taxpayer rrrrr y rlirninish his liability by any means which the law permits (Heng l\'trs'l'extiles Co., Inc. [Philip Mfg. Corp.] u. Commissioner of Internal litrcn.Lt€t et al., L-19737, Aug. 26, 1968). Moreover, as stated by the U.S. Supreme Court: "To avoid is legal l,ul to evade is illegal. The legal right of a taxpayer to decrease the rrrrr)unt of what otherwise would be his taxes, altogether avoid. them, l, y c&ns which df_e ]AU:-BerI0*s-_sannat_bs_{olbted- ( Grego ry u. tl,'locring, 29 U.S. 465). 'l'a.x evasion may be exernpiified by means of. tax fraud, or the ,r:;r'of deceit in order to evade taxes. Fraud, however, is a serious ,lurrge and to be sustained, it rnust be supported by clear and , ()rrvineing evidence (Republic u. Ker & Co. Ltd., L-21609, Sept. 29, t 966). Fraud, being a question of fact, must be aileged and proved 1t iutierrez, et al. u. CTA, et al., 101 Phil. 713). Illte=4elstqrqr!-s:uhpl}er-tg-rr4-9g-qle,-FLbs-!e;r99q"{qq!&rq, ,;hould control. When the purpose of a taxpayer, at least in part, is 1,, evide--[il-ei, the court should exarnine with particu].ar care the lbrms used by him for the sccomplishrnent of his purposes and if his rngenuity fails at any point, such court should not lend him its aid lly resolving doubts in his favor (51 Am" Jur. 45). Our jurisprudence includes cases where tax evasion or fraud was f'ound to have been perpetrated. For instance, in one d.ecided case, it was held that the failure of the taxpayer to declare for taxation purposes his true and actual incorne derived from his furniture husiness at Clark Airbase for two consecutive years is an indication of his fraudulent intent to cheat the Governrnent of taxes (Republic u. Gonzqles, L-17962, Apr.30, 1965)" In another case, the Co,rrt described the taxpayer's fraudulent actuations in these words: "The net income underd.eclared in 1946 ls rnore than 100% of the net income declared. trn 194?, the undeeiared net income was more Lhan 1,079% of the net ineome declared. In 1948, the undeclared n"et incorne was 260% of the net income declared. In i 950, the undecl.ared net income was rnore than 1,00070 *f the declared net incorne. We have no iresitancy in 'l'rr x
lrr.
r r r
uvoidance is not forbidden in our
111'gi6lsd
l,n
w ol.' tlAsr()
1.AxA,t,roN rN,r,ilr,: I,ilrr,rI,r,rNrr.s
I)()T]I}I,I.]'IAXATION AND TAX EXEMPTIONS
,:L:::#:":HX ::l1l ly1 :10,", the ci rcumsta nces, such h sa *,f,:1ffi J;f;* j;taIi:t3li,i:T jlilfi Iili,"",t"*ffi :f }:fr u
which would ne to mister'jrerrect trom any conduct the likely effect oi u. Reyes, 104 Phit. ,t;;;;;:::.;,1."u, (cotteetor of Internat R","nuo
,,.01T"1.1:n
:::,f,, II i:,
J; xisred i n
rh e
rouowing case
: rh n
:?.ff i#Jilx':J,llx'il$r#"],,T];il?i,l';???f :J[:I,,XT
when he actuallv
hisact,";;;;,H'"f,:^,^,:ltitiii:i?#fr:#;:,."i??"'3# ;f :1tl jffi ?i:;ii"Hilt'1iii:!t;:!i,',il::"Ifir"r" j:..lJ,fl ,?; (Au
R
eu
enue, L - I T f 1 s,
Where
it
had wilifulry
r, ilr:"r?rtfi
ud
elino u.
C o llector o f
Internil
appe
ffi;*r""r'li:11:,r::llr"r,
although on accrual basis, worth almost ff OO,OOO :r.,rv?.1-rncome by treating copra outturn fact such copra ^:: i"Y::: :tjlloutstanding at the end of 19b1, "when-in
i:iii:srffffi:H:":l*:*r#:ff i:it'i,"l,'J:""::1?:":iI
if the taxpayer includea 't'urthermore, such fraud is aggravated for 1952 thus eventu"il;;:1:i1,"::.1tturn in its beginning inventory "rll;
i?Xtri:,#,;?n,Jj'l.;#ff ::il?J:lilf ;ff :,(;H,,1;"Tli:;; L'::731'
Mar' 31' tiob)"'""*"' Looking at the o,ilJ]':' there was no fraud. i" tfr"."ll,ot the question, it was determined that 1. The fact thr _ 'Qllowlng cases: is statedli ,"Jl:" ordeceden_rs shares of stock (which
;; ;::aff lffiil{X,:;t?iJff :1;:ji:i.,:[":]fi:,""T"fi1T,,,ff ff:]#Ji? of stock value.
frequently fluctuate in Mere differ"""" oi-^j.nares intentio, to all'''o.n ganltot serve as a proper basis for of cesar ratand.oni, (Repubtic u. Heirs 2. Where taxpr differs from rhe ,;iJ;r1:.ratuation of certain rice and susar tands by the Commissioner oilnternal Revenue, there is Pla" co rmpute flayd "" b;J; valuation is only basea where the difference in ,ri honest difference of opinion. taxpayer made a If the -i"takl';*qntfluation, the same mistake (Republic r. Aa* is only an honest it noted that an honest irrt""Lr Lesor,lalandoni, supra). It should be ca se, it wa s h eld tha t w he re assessing an
-,
,.d;;:U::;F,T;iifent
;T#r#:rf ;:,ii:i::";hfr* Jill; 126
by him in computing his tax liability is correct, he does attaches rr,,rrrnrr:;si.
l',r rni'rrr ilny fraud, in which case, no fraud penalty
1
lo Delfin Jalandoni; or Lot 228 which, including
irnprovements, has a market value of ?16,900.00. Hence, lrorn the foregoing, we find that the aggregate value of the af'oresaid four lots is F86,610.00 which if deducted from the Lotal value of the seven Iots amounting to ?90,110.00, gives a balance of ?ts,500.00 as the value of the three remaining lots. These three lots being conjugal property, one-half [hereof belonging to the deceased's spouse should still be deducted thus leaving a smali balance of ?1,750.00" trf to this we add that, as the record shows, these three lots were
already declared in the return submitted by Bernardo Jalandoni as part of the property and his wife for purposes of income tax, there is reason to betrieve that their omission from the return submitted by Cesar Jalandoni was merely due to an honest mistake or inadvertence as properly explained by appellants. We can hardly dispute this conclusion as it would be stretching too much the imagination if we would find that, because of such inadvertence, which appears to be inconsequential, the heirs of the deceased deliberately omitted from the return the three lots with the only purpose of defrauding the Government after declaring therein as asset of the estate property worth ?1,324,555.80." 4" A tax return which does not correctly reflect income noay only be false but not necessarily fraudulent where it appears that the return was not prepared by the taxpayer himself but by his accountant and that after the original deliciency tax assessrnent was made, the sarne was subsequently reduced by the BIR by a substantial amount. Hence, the 50% surcharge for fraud may be 127
(
r
DOUIJLI' TAXA'TION AND TAX EXEMPTIONS
I,AW OI.'tsASIC TAXAI'ION IN TI{U I'HILIPPINES
dispensed with but the tax may
still
be assessed within tho prescriptive period of ten years from discovery tbercof (Aznor u. crA, et al., L-20569, Aug. 2J, 1gf4). It should be noted that in the abovementioned case, the taxpayer,o deficiencv income tax was assessed. and. d.etermi".d ;iJ;;;h the uee of the so'called "net worth" method, or what is otherwis"irro*r, the "inventory method of income tax verification." "u 5. In a certain case decided by the tax court, the ruling was to the effect that where a coupre in ihe philippines a dolar remittance check from abroad in the.*orr.,i $t Miuiorr, """"irr*a said amount being the result of an error of the remitting bank as the sum that was actually supposed to be remitted was only Et,O0O, if it appears subsequently that said coupre spent the differeo"" or $ggs,ooo on various purchases of property both here and abroad for their own material benefit, said sum constitutes taxable income. However, no fraud was imputed against them since in the income tax return, the amount in question was declared with the notation: "Taxpayer was the recipient of soroe money from abroad which he presumed. to be a gift but turned out to be an error and. is now the subject of litigation." No fraud existed because the taxpayer had Iiteraily laid his cards on the tabre (Metchor Je,uier u. comiissianer, C'I'A Case No. 33g,?,,luly ZT, tggs; Comm.issioner of Internal Rerenue u. Jq.uier, Jr., et al", G.R" No" VggSS, Juty 51, lggl).
CASES
MANITA ELECTRIC COtif,pANy v. VERA, ETC", L-zgg8?, 0cT" 20, t976
r.!
r.usl, tlo so under clear and unmistakable termg found in the r, 'l'ax exemptions are strictly construed against the taxpayer, rl,,.y lrr.in11 highly disfavored and may almost be said to be odious to
.,1 tr r r r I
I1,,. irrw.
l'r,lrt,ioner's franchise exempts it from the payment of property l.q .n i[s poles, wires, transformers and insulators, but not from ,n t of taxes, like the one in question which, by mere necessity 1,, l *r r rrrrir)euence alone, fall upon property. Il rs a well settled rule that a compensating tax is not a property rrrr lrrrt an excise tax. An excise tax is one that is imposed on the 1,r.rl.r'rrl&[ce of an act, the engaging in an occupation, or the ,. 1.y rnert of a privilege. A property tax is a direct tax, whereas one l, r,rr.rl on property because of its use, is an excise tax. r r r
r
rr
t,I(OCTER & GAMBLE PHILIPPINE MANUFACTURING '( I It P" v" IVIUNICIPALITY OF JAGNA' PROVINCE OF BOHOL'
{
t,'1,t')66, DEC" 28, 1979
/ACTS: Plaintiff company appealed from a judgment of the First Instance of Manila, BranchVI, upholding the validity ,,1 ( )rclinance No. 4, S. of 1957, of the Municipality of Jagna impoeing ,, :rt,orage fee of F0.10 for every 100 kilos of all exportable copra ,1,'l,risited in its bodega at said municipality. 'lhe issues raised were as follows: (1) Whether or not the ,lrr.stioned ordinance is valid, legal and enforceable against the ;,lrrintiff; and (2) Whether or not plaintiffs action to recover the tax s,rrid under protest pursuant to such ordinance has prescribed. ('rrrrrt, of
HE{,D: The Court ruled tha* &{eralco's positioar cannot be sustained" one who claims to be exeurpt fmm paymen& of a fa*icular
HELD: The main question to be determined is whether or not ,lt,fendant municipality was authorized to impose and collect the ,rl,or&ge fee provided for in the challenged ordinance under the laws I lron prevailing. The law then in force (C.A. 472) provides as follows: "Sec. 1. A municipal council or municipal district couneil shall have the authority to impose municipal license taxes upon persons engaged in any occupation or business or exercising privileges in the municipal district, by requiring them to secure licenses at rates fixed by the municipal council or municipal district council, and to collect fees and charges for services rendered by the municipality or nnunicipal district and shall otherwise have the power to levy for public local purposes, and for school purposes, including teacher'g salaries, just and uniform taxes, other privilege taxes and taxes on specified articles."
128
r29
FACTS: Manila Erectric Bail and Light co. (Merareo), holder of franchise to constmct, maintain and operate an electric right, heat and power system in the City of Manila, imported wires, transformers and insulators for use in the operation of"oep*1 iii business in 1962. In 1968, it again imported ccpper wires, transformers and insulators to be used therein. Both fmportations were subject io compensating tax (now, VAT). So Meralco, after paynaent thereof claimed its refund which was denied first by tne n'rd urJ iut"*, o* appeal, l:y the crA. frIeraico eraims thst ttre irnpoJations are tax-exempt under its franehise. Is &{erarc*'position eorrect? a
I)OUITLE TAXATION AND TAX EXEMPTIONS
Suid provisio
t.,ll['fi-:lt3;i::l1l i::"r "J;;;;: f.. rrcense tax or
tt, u p"i',rlt"'s;
jurisaicti-oT.
or ricenses rbr regurarion is actually a municipal
llflirl) r'r rrrrt'lrority for the view that the period for prescription lt,ttrr l,o recover municipal cf lia";;'r".es is years six under r I I I 'l r'(2) '1 of the ci":r c"aul irr*, ,r."r"tiff s action brought within arc 1't'111' lrom the time the right#;;i;; first accrued in 19bg has Ilrl yi.l prqsCribed.
fi rm s rd ";;;;;:;iffj::uestion #1."^:-'"""ons, " copra in "o"po"ar;;;, ht; exercisins
u uoausu
oo;""t^"^:'"*
copra is properlv .",o"ui.tr,"
t"-J;;."::ga
$hTHTh;:,1trH{"j:,r'ffi Plaintiffs .
- inappiic;';i;;:"P"nt ave is
tha+"
;i;;ffi'il:,ke within the m u n icip
a Ii
t)/;
*il{l:,}ilhlll*i",ffi
the ordi "i
;'
;ffi
; !H", f H :' il ll : u ", i " ; ;fi # l,_ ". " ff I """1,,j; ;::ffi ::,.,,""'xl,tli._rlii!J,"j,_rlii:!;uu,io".,ryi;.;;#*coprain p
u
u.
u
t"
Ht
lv /l
'
rd r, l,,,,rrs
'['he prescriptive period now for the recovery of local taxes (Sec. 194,
iocal
A;;;;;;;i"ioo"l.
iIII \I.'\N. ., r
r
r, \,
r,,
N r r rr,
O!.^.,U-. COMMISSIONER OF INTERNAL Er AL., c,n. NoI ;r;ffi;;J; 28, 1e8z (RESoLUrroN)
-' --'' qvlJvruuts(r appointed arltr qualifr ed Rrc a nd qUalllled I('IU jJUClgeS lrr I\lrrrrrlA, ud ges i,, I l,',i Seek tO D and/or perpetually ""1;'l'1"::jr.1,"lv
Ir rrrsl 11s1,Lir.,,
enjoin respondents
,;Lo^libit
"._ ;,,,hffji"'#i,J";ililiJ""'1,"Tff y_*1""i;;f unelr salartes, t,rrl.rrrling that l::;:;::l:l*:ff :,j this diminution j,'r lo, of ur ri,,r salary $arary contrary ".,r,"tii,,i^l';.::]l?."rts^rruru to lg. ArtArt. VIII, vTTr lggz r"lj}"'ilYtes. c".".r*,,*l'-:-'-'Jl-""" I rlr. r,erlbers nr ,r1?:-l"rnution, which provides tt rtifr" s o #'c :";'u'jTJ;::"# a[q Juqges ot lower ffJ :: ""tu"y l,, : I i' ;,l,t::' ;,T:; :3lT: courts ',1',rll fixed f..',i " "L by lu* and "ffi ,.,Jii;;;r:::'j that "during their ..;11211, oh.rr coitirrrrurr"" Irrr,.11 tr,'r r 51[s1y in office, shall not -^j U" a""i"urJj.,, : I
m,,m
lt
:
lll')LD: The salaries of the chief Justice and Associate Justices llt. supreme court.as well-as-il;; "l of judges of inferior courts tt t 't' l111s,s' The crear i"t""t orfi" iioi*,ir.,rional commission was r,,,rr,rcre the proposed
from payment of tax to members".r;;;;;;;;ii"."_ption & trr" *il;;, so as give to substance to "'1r'rlity among the threet;il#r rido.,,""rr-".t. t lr' rlcliberations In the course of in the c"*;iffit"*ltommis"ion, it was expressly clear that the ""r'l' "utu"ruloi;;ffi;r of the judiciary would be 'rrill.ut to the sener1lln9o.m;6.;;ffid to au raxpayers. settled is rl"' I'undamentar principle thalJi'"lrr"r, of the framers of the ,, r l,;r nic law and of tl ,,,,, t, turi n e ct ( G o t d. ;;;:; T:1,.:r ;i:,i ; :;; "Xerr ,'|, (,rre
ifi
#'
:ii:rti
*"*g***rm$.rm*x**
t',wtMISsroNER OF-INTERNAL REVENUE v. MITSUBTsHI coRP'' nr ei. c]il*tt.^JnrO8 and 80041, JAN. 22, li,'Jlo"
fr*,fi5$fl||$g[Hrl'd'[,*lx,H,:#$
FACTS: Mitsubishi Metals Corp. (Mistubishi), 'ttrporation licensed t" a" u""i"";;"rh" philippines, a Japanese rr l'oan and sale cortract *trh"dil consolidated entered into I )r'velopment Mining ancl corp. ta,r".i ii,"""oi iili."bishi lent $20, 000,000 for llrtl expansion of the_lattu"'. -ir"",'*.ri.rr"rly the installation of a rr('w concentrator for copper p"oar"tiorr. Atlas, in turn, undertook
130
131
DOUBLE TAXATION AND TAX EXEMPTIONS
LAW OF BASIC TAXATION IN THE PHILIPPINES
to sell to Mitsubishi all of the copper concentrates produced by machine for 15 years. For this purpose; Mitsubushi applied for and was granted a by the Export-Import Bank of Japan (Eximbank) and a consortiu of Japanese bahks. As agreed upon between Mitsubishi and A the latter gave interest payments for 1974 and 1975 amounting P13,143,966.79, with the corresponding 15o/o tax thereon withh and remitted to the Government as required by the Tax Code. On Mar. 5, 7976, Mitsubishi filed a claim for tax credit of sum of Fl,972,595.01representing the tax withheld on the inte payment. That claim, not having been acted upon by the BI Mitsubishi then filed a petition contending that Mitsubishi was mere agent of Eximbank, a Japanese Government financi institution which financed the loan. Such governmental status Eximbank was the basis of Mitsubishi's claim for exemption f paying tax on the interest payments pursuant to Sec. 29(b)(8) (now, Sec. 32[B][7J[a], 1997 NIRC). The CTA granted the tax in favor of Mitsubishi, which later executed a waiver in favor of A
ll
1,,
l't I ITLIC BANK v. COURT OF TAX APPEALS, ET AL., G.R. SEPT. 2, t992
Nr )S. (;2554-55,
lt,,lOTS: Petitioner was assessed a lYo monthly bank reserve rlrrcy tax in the amount of (a) ?1,060,615.06, plus 25% surcharge ,rr'.rrrrt,irIB to P265,153.76, or a total of ?1,325,768.82 for taxable i , ,, r lt)69; and, (b) F1,562,506.14 plus 25% surcharge of F390,626.53, ,,r ,r tolal of ?1,953,132.67 for taxable year 1970. All motions for 1, , ,,r.;ideration having been denied by the Commissioner of Internal It,,r,,'11,,", petitioner filed a petition for review with the tax court ,, r l.r r r rg that Sec. 249 of the then Tax Code is no longer enforceable lr.r rrrSC Sec. 126 of Act No. 1459, which was allegedly the basis for tlrr rrrrposition of the 1% reserve deficiency tax, was repealed by the I i'rr.r'al Banking Act and the Central Bank Act. trt was also argued rlr,rt rrr case of a reserve deficiency, a violating bank is liable for a r,,n ,l loA payable to the BIR under Sec.249, NIRC, and a penalty ,'l r/l() of 7%o a day payable to the Central Bank under Sec. 106,
,1, l r,
f
li \
:r{;i-),
the interest income from the loans extended to Atlas by Mitsu is excludible from gross income taxation and thus exempt f withholding tax; and, corollarily, whether Mitsubishi is a conduit of Eximbank. While factual findings of the CTA are generally not disturbed appeal, a misapprehension of facts on the part of the tax court w warrant a departure from sai.d general rule. The loan and sa contract between Mitsubishi and Atlas does not contain any di or inferential reference to Eximbank, and was, therefore, stric between Mitsubishi and AtIas. It is settled that laws granting exemption from tax are constr strictissimijuris against the taxpayer and iiberally in favor of taxing power. Taxation is the rule and exemption is the exception, The burden of proof rests upon the party claiming exemption to that it is in fact covered by the exemption so claimed, which on private respondents have failed to discharge. The taxability of a party cannot be blandly glossed over on th basis of a supposed "broad, pragmatic analysis" alone withou substantial supportive evidence, lest governmental operations suffer due to diminution of rnuch needed funds.
l,)t,D:
The wisdom of the tax legislation is not the province of lt is clear from the statutes then in force that there was ,,,,,l,,rible taxation involved was a penalty and the other was r,rr Al any rate, the validity of double taxation has been upheld. 'r II
HELD: The principal issue in both petitions is whether or
rl,, ,,rrrt.
ll,, Irr!ment of 1/10 of 7% for incurring reserve deficiencies ,, , 106, Central Bank Act) is a penalty as the primary purpose r' is regulation, whiie the payment of lo/o for the same vioiation ,,, :119, NIRC) is a tax for the generation of revenue which is the 1 (
11,1,6[
t,,r;rry purpose in this instance. Petitioner should not complain r t ( is being asked to pay twice for incurring reserve deficiencies. lr ';11q always avoid this predicament by not having reserve
I t
l
r
,1,'lr,'rtncies. Petitioner's case is covered by two special laws one, ,, l,;11111 ing law and the other, a tax law. These two Iaws should receive ,,r, lr construction as to make them harmonize with each other and ,. rrlr llre other body of pre-existing laws. Durct lex sed lex.
N,\'r'!ONAL POWER CO&POBATION v. PROVINCE OF I .\NA() nEL SUR, mT AL., G.R" NO. 96700, NOV. 19, 1996 /,'.,1(]7S; Fetitioner National Fower Corporation (NAFOCOR) ,,* r'; r'ofll property in Saguiaran, Lanao Del Sur comprising its Agus Il llvtlroelectric Polver Plant Cornplex. It was assessed real estate i,q,,r.;; 1v11 said property for the period from.,Tune 14, 1984 Lo Dee. 31, | 'ri iir rrrnounting to FI54,114,854.82, aliegedly hecause its exemption t,!,nr rllrl esLaLe taxes has been withtiralvn.
LAW Ot,' IIASI(;,t,Ax^,ftoN lN .fHE t'Hu,il,t,tNES
I)emand letters for the payment of said real estate taxes v provincial i"uu rr"", *ith a warnir*,r, nl, n ::li :J i::T:-d""l settled, legal remedies will be resorted to. O" D"". i;,lA;0,*u w,, of Auction Sale was s.erved on p"tiiio""r with copies thereof tl posted in the provincial capitoi bril;;;; in n-ewspapers. The auction sate was schedu :-"ll::^*Y;rti,s1a at 10:00 AM., July 22, tggi,at the Office of the provincial Treasu in Marawi City. Petitioner directry filed with supreme court the petition prohibition with p.rayer,for athe pi"ii*i.r""y injunction and/I temporary restraining order (TRO)
ffi';;;;;ffi;:l;
"":oi"i"g-"J.o"ra""r_'i of-subsecJ properties.
However, ::::::j.:q^Tll,!h:,"uction auction sare was held as schedured, iriilriir"'p";. i,,."'riillT; sur as the sole bidder' A certificat" orrriu was issued and resisrr with the Register of Deeds day,. respondents provincial "" so""i;o; and. provincial treasJ received telegraphic notices oflire C*it," fnO. Petitioner contends that it has never been 'which, effectively depri j"1.T_r:.1_1y.lr. exemption, ti lJ*ior" ::_,* withdrawn, were just as quickty ""J "".to""a.' piop"*iu, were wronsruuy reviel I,#::1 ;':?t:.:iT:', 11".i"u: "* and sold at public. auction. n""p""a"";r';;r;;;iiil:ilJ",x:l petitioner's exemption from real taxes were withdrawn ol revoked by P'D. 19s1 and had never "riui" blen_varidly restored by thr resolutions of the Fiscar Incentives R"uie* Board (FIRB) nor by thc memorandum of Executive Secretary Macaraig, Jr., thus ,"rra""ing it liable for real estate taxes.
th;;;;;;;;. tiiJil5"Tf,:":;
";;; ti";;##;"j;#illil
HELD: The main issue is whether or not respond.ent province and provinciar officials can validly assess real property taxes ibr the period from June r4-, rgg'to ""J]"*rrlry ouc. at, tgg6 una thereafter se, at pubric auction trre suuject properties of ^i.'ir", NApocoB to effect collection of aresed deficien-Jies in fi," of such taxes.
;;6;;
on the pivotar issue of whether or not petitioner has rost its tax and duty exemption privileges, trru cr""t ruted thaiairrrrrut sec. I of P'D' 1gB1 withdrew alr tal exemptio,i. pr"r.r*abry incruding
those of NAP.COR, Sec. 2 thereof u"iiro"ir"a ,"J;;;;;ied the President and/or the Minist", oi'i"""ce to restore the sarne to deserving entities. In order to petitioner,s tu* e*"rip*ons, FIRB Resotution No. 10_8b.""irr"tui" *;; ;;;;"tgated, effectiv* as of June 11, 1984, the promulgation aui" orp.n. rgBl, r.iit'"lurr* go, 1985' FIRB Resorution No. r-eo fuliy restored NApoco*,s tax 134
DOU
ltl,lrl'l'AXA'tlON AND'l'AX lIXEMPTIONS
e;r.rrrlrtl)n o1July 1, 1985, to continue for an indefinite period. Thus, -' l,rl'' l,l O. 93 again withdrew petitioner's tax exemption, Ht.,r
rtlr|less Sec. 2 thereof authorizes the FIRB to restore tax
Hull!,r rlrrty exemption thereto' FIRB Resolution No' 17-87 restored rlr, ,.rr.rrrption privileges of petrtiotter, effective Mar' 10, 1987'
(',rrrsidering the entire chain of events,
it is clear that
toR's tax exemptions for the periotl in question (1984 to 1989) ,,ll'r,r:lively been preserved inLact by vtrLue of their restoration lIr,l rl,r,,rr11lr !'IRB resolutions. Moreover, this Court tn Maced'a u' 7l't,1il (tig, Jr., etc., et at. (G'R'. No. 8829 i, .lune 8, 1993) reaffirrned r1,,, ,l,,l,crmination tn National Pawer {'orporation' u. Prouince af ttt,,rs', t't ol. (G.R. No' 87479, June 4, 1ti$il) that E'O' 93 along with l'tt 't'16 and P.D. 1731 were all vaiid, and that FIRB R'esolution 1,, t'l 87 and the tax exemptions restored thereunder were valid ,,rr,l ,'l'fective. Asicle from the FIRB resolutions, sec. 40(a) of P.D. 464, the law Republic r I ,, .r r i n force, expressly exernpts "rea-l property owned by the ,,t rlrc philippines or any of its poiitical subdivisions and any so exempt by its 1,r vr,frrrl€D.t owned and controlled corporation , I'r, rl,er," lnasmuch as the realty tax assessntent levied against and the ,,rrr'(iorI sale of petitioner's properties had been premised on ,,.,,Pond.ents' erroneous belief that FIRB Resolutions Nos. 10-85' I f1(i and 17-87 are void, the judicial declaration of the validity of ,,,rtl resolutions ipso jure remders such assessment and sale void' I i \ t,( )(
,l-he
assessment of realty tax being void, petitioner never became ,l,.linquent in the payment of said taxes to respondent province and
tlr. latter never acquired any right to sell nor to purchase said ;,roperties at auction. In short, there were never any taxes'
,lr,linquent or otherwise, to satisfy. This decision is solely with respect to the purported tax (,xcmption liabilities of NAPOCOR for the period from June 14, 1984 r,r Dec.31, 1989 vis-i-vis its tax exemption status based on P.D. .lci4, which was still good law at the time the exemption was claimed, \vithout ruling upon the effect of R.A. 7160, or the Local Government ( )ode of 1991.
CoMMISSIoNERoFINTERNALREVENUEv.S.C'JoHNSON
AND SON,INC., ET AL., G.R. NO. 127105, JUNE 25, 1999 FACTS: Private respondent S.C' Johnson and Son, Inc' (S'C' .lohnson), a domestic corporation organized and operating under 135
{
LAW OF BASIC TAXATION IN THE PHILIPPINES
DOUBL!] 1'AXATION AND TAX EXEMPTIONS
Philippine laws, entered into a license agreement with S.C. Johnson and Son (USA), a non-resident foreign corporation based in the U.S.A. Pursuant thereto, private respondent was granted the right to uso the trademarks, patents and technology of the latter, including the right to manufacture, package and distribute products covered by the agreement and to secure assistance in management, marketing and production from S.C. Johnson and Son (USA). Said license agreement was duly registered with the Technology Transfer Board of the Bureau'of Patents, Trademarks and Technology Transfer. For the use ofsuch trademark and technology, private respondent paid S.C. Johnson and Son (USA) royalties based on a percentage of net sales subject to 25o/o withholding tax thereon. For the period from July 1992 to May 1993, private respondent paid ?1,603,448 as withholding tax from royalty payments" On Oct. 29, 1993, private nespondent filed with the BIR International Tax Affairs Division a claim for refund of ?g68,226 representing overpaid withholding tax on royalties paid, arguing that since the agreement was approved by the Technotrogy Transfer Board, the preferential rate af LAo/o should be appiied pursuant to the most-favored nation clause in the RP-US Tax Treaty (Art. 18, Par. 2tbltiiil) in relation to RP-West Germany Tax Treaty (Art. t2[2][b]). For failure of the comrnissioner of Internal Reventre to aet on said claim, S.C. Johnson frled a petition with the CTA. The CTA ruled in favor of s.c" Johnson and ordered the commissioner of trnternal Revenue to issue a tax cred.it certificate for ?g63,226. The Court of Appeals affirrned the decision of the C,tA in toto. ?he main point of contention is the interpretation of Art. 13(zXbxiii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Fhitippines on a royalty received. by the non-resident foreign corporation, which read.s "the trowest rate cf the Fhiiippine tax that may be i.mposed on the royalties of the sarne kind paid under similar circumstances to a resideni of a third state." S.C. ,lohnson contends that based thereon, it is entitled to the concessional tax rate of 10% on royalties, per Art. 1Z(ZXb) of the RF-lVest Gerrnany Tax Treaty. flontrariiy, the Commissioner of Internal Rerrenue avers that the taxes upon royalties under the HF-us raN Treaty are not pair3. r"rnder circumstances similar to those provided in Art. 24 of the RF-West Gerrnany Tax Treaty since there is no provision for a 2Q% matching credit in the former convention anei $.c. ,leihnssn cannot imr,.oke the eoncessional tax rate *n t]:e st,rcngth sf thr: nrr:et-favored natr*n clause in tire i{,p-q_i$ T,ax "{'reat;y.
'l'hc issue in the present case is whether or not S'C. Johnson rtlliA) is entitled to the "most'favored nation" tax rate of 10% on r,,y:rll.ies as provided in the RP-US Tax Treaty in relation to the
i Qcl
l{
l'
Wcst Germany Tax Treaty. t
tltLD: The petition is meritorious. The phrase "royalties paid
rrrrtlor similar circumstances" in the most-favored nation clauSe of tl',. IIS-RP Tax Treaty necessarily contemplated "circumstances that ,, r
,. l,irx-reIated."
I n the case at bar, the state of source is the Philippines because lr(. royalties are paid for the right to use property or rights, i.e', I I rrrlcmarks, patents and technology, Iocated within the Philippines. 'l'lr(' united states is the state of residence since the taxpayer, s.c. r
.l,lrnson and Son, U.S.A., is based there. Under the RP-US Tax 'l,r-ilgty, the state of residence and the state of source are both 1r|rrnitted to tax the royalties, with a restraint on the tax that rnay 1,,' r:ollected by the state of source. Furthermore, the method ,.rrrployed to give relief from double taxation is the allowance of a I :r x credit to citizens or residents of the United States (in an amount based upon the taxes paid or accrued to the ',g,lrropriate l,lrilippines) against the united states tax, but such amount shall ,,,,t exceed the limitations provided by united states law for the l;rxable year. Under Art. 13 thereof, the Philippines may impose one gross amount of the royalties; 15% when ,,1't,hree rates - 25% af.t]he r lre royalties are paid by a corporation registered with the Philippine Itoard of Investments and engaged in preferred areas of activities; ,rr {,h€ lowest rate of Philippine tax that may be imposed on r.oyalties of the same kind paid under similar circumstances to a rrsident of a third state. Given the purpose underlying tax treaties and the rationale for i,he most-favored nation clause, the concessional tax rate of 10% provided. for in the RP-Germany Tax Treaty shouid apply only if the i,trxes irnposed upon royalties in the RP-US Tax Treaty and in the Ii.P-Germany Tax Treaty are paid under similar circumstances" This would mean that private respondent mtrst prove that the RP-US .[,ax Treaty grants simiiar tax reliefs ts residents of the United States in respect ofthe taxes imposable upon royalties earned frorn sources within the Phiiippines as those allowed to their Gerrnan counterparts rrnder the RP-Germany Tax Treaty' The RP-US and the RP-West Germany Tax Treaties do not corrNain similar provisions r:n 1,ux crediting' AtL. 24 of tlie ii,P"West Gerrnany ilax Treatv expressly allou's crecliting against {}erman income and corporation Eax af 2A% of the gross atnou;li '-ri
r
l,nw olr IIASIO'l'AxAl.loN lN,l.llt,l l,llt l,lt,t,lNl,ls royalties paid under the law of the philippines. on the othor ha,rl, Art- 23 of the RP-us rax Treaty, which is the counterpart pr.visi.rr with respect to relief for double taxation, does not p.ouldu ri,,. ,, similar crediting of zo% of the gross amount of royalties paid. The reason for construing the phrase "paid und.er simir,r circumstances" used inArt. 1g(zxbxiii) of the Rp-us rax Treaty ur referring to taxes i.s anchorett upon a logical reading of the text in light of the f*nda*ental purpose of such treaty which is to grant a lr incentive to the foreign investor by lowering the tax and at the samo time crediting against the domestic tax abroad a figure higher tha n what was collected in the Philippines. since the RP-us rax Treaty does not give a matching tax credit of 2a% for the taxes paid to the philippines on royalties-as allowecl under the RF-west Germany Tax Treaty, private respondent cannol; be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. Tax refunds are in the nature of tax exemptions. As such they are regarded as being in derogation of sovereign authority and to be construed strictissimijurls against the person or entity claiming lhe exernption. The burden of proof is upon him who claims the exempt'ion in his favor and he must be able to justify his claim by the clearest grant of the organic or statute law. EANAS, JR. V. COURT OF APPEALS, ET AL., G.R. NO. 102967, FEB. L0,2000
FACTS: On Feb. ZA, !976, petitioner Bafras, Jr. sold to Ayala trnvestment corporation (Ayala) rz1,z6b square meters of land in Bayanan, Muntinlupa for P2,B0B,rr0. upon signing of the contract of sale' ?46L,754 was paid as an initial payment, urrd thu balance of F1,847,016 was to be paid in 4 equai annual installments with 12% interest per annum on the outstanding balance. Ayala issued a promissory note covering 4 equal annual installments payabie at the rate of P461,?b4 starting on Feb. 20, 1977, and e.,re.y year thereafter until Feb. 20, 1990. on the same day, petitioner Baflas, Jr. discounted the promissory note at its face value as evidenced by a deed of assignment. Ayala issued 9 checks to petitioner, all dated Feb. 20, 1976, drawn against the Bank of the Philippine Islands with the uniform amount of ?20b,224. In his 1976 income tax return, petitioner reported the initial payment of ?461,754 as income frour sale of a capital asset. In the 138
IX)T1I}I,IJ TAXA'I'ION AND TAX EXEMPTIONS
,,,,,,,.r.r1ir)g years
until
1979, petitioner reported a uniform income
,'t tr:l:i0,877 representing \Oo/a of the agreed yearly installment of r l(i I ,71)4, as gain from sale of capital asset. The same amount was ;,';,,,r'1.r.{ in his 1980 income tax amnesty ,,,, ,lrslrosition of capital asset.
reiurn
as the realiaed
gain
Apr. 11, 19?8, then Revenue Director Calaguio authorized Itll( t.rrx exarniners Tuazon and Talon to examine the books and 1r., or.(ls of petitioner for 19?6. They discovered that petitioner had (
)rr
r,,,,rrrl,standing receivables from the 1976 land sale to Ayala, thereby ,,r,,.ltrding that the same was a cash sale and the entire prolit should l,,rvr.been taxable in 1976 since the income was wholly earned in t'rlt;. [,'inding a discrepancy of f2,095,915 in petitioner's 1976 net
,
they recommended a deficiency tax asseSSment Of t'.',.173,673. Subsequently, Revenue Director Larin, herein
nr(.()rpe,
,, :,lrondent who succeeded Director Calaguio, directed the revision ,,1 llrt: audit report to have the land considered as capital asset, with tlrr. t,rrx due of only 50% of the total gain frorn the sale of the property 1,,'yrrnd 12 rnonths, pursuant to Sec. 34, NIRC. Accordingly, the ,l,.lrt:iency tax was reduced to?936,598.50, inclusive of surcharges ,,r,rl penalties for 1976, with the demand for the same to be settled ,,,rrnediately. On Sept. 26, 1980, petitioner acknowledged receipt of
rlr,. IJIR letter but insisted that the sale was on installment. on ,,.,,.rmmendation of the BIR Tax Fraud Unit, respondent Larin filed ,, ,.riminal complaint for tax evasion against petitioner Baflas, Jr. ,,rr .lune 1?, 1981, with news reports about the tax evasion charges l,r.ing published in the newspapers shortly thereafter. On July 2, 1981, petitioner filed an amnesty tax return under I'l). 1?40 and paid?41,729.81. On Nov. 2, 1981, he filed another :r rrrnesty tax return under P.D. 1S40 and paid an additional amount ,,1'tl,525.62. In both returns, petitioner did not recognize the land rrrr lc as having been made on cash basis. In reaction to the criminal ,.,rrnplaint for tax evasion and the news reports, petitioner filed an rr.,t,ion for damages against herein respondents Larin, Tuazon and 't'rrlon for extortion and malicious publication of the tax audit report, rr rrd claimed that the filing of the criminal complaint was improper lrccaus€ he availed of the tax amnesties under P.D. 1740 and I'_D. 1840. The trial court ruled in favor of respondents and awarded rlllmages to respondent Larin, which decision was affirmed by the ( lourt of Appeals. Hence, this petition, faulting the appellate court for holding that ( l) there was no extortion attempt by the BIR; (2) P.D. f i40 and t'.D. 1840 granting tax amnesties did not grant immunity from tax su its; (3) petition""'r income from the 1976 land sale to Ayala should 139
r
LAW OF BASIC TAXATION IN THE PIIILIPPINES
l)ou t]t,!l'l'AxA'l'IoN AND TAX rlx!)MPTI0NS
have been declared as a cash sale since he discounted the promissory
IrIl,ri(:{rn law is that where an installment obligation is discounted ,rt ,r lrrrrrk or finance company, a taxable disposition results, even if
note on future installment payments on the same day of the salo; and, (4) damages should be awarded to respondent Larin.
i
HELD: The Court of Appeal's factual finding that there was no evidence of the alleged extortion attempts by BIR officials other than petitioner's self-serving deciarations cannot be disturbed unless said findings are not supported by evidence. The supreme court upheld the respondent court's conclusion that respondents could not be held liabIe for extortion. On the issue of whether P.D. i?40 and p.D. 1g40 granting tax amnesties also granted immunity from criminal prosecution for tax offenses, the court ruled that petitioner did not meet the twin requirements of P.D. 1740 and P.D. 1840, i.e., declaration of his true and correct untaxed income and full payment of the tax due thereon. In this case, petitioner entered into a contract of sale purportedly on installment, but on the same day of the consummation of the sale, he discounted the promissory note covering future installments with the buyer, rather than a Iender. After the filing of the criminal complaint, petitioner filed his tax amnesty return in Bulacan, instead of Manila where he had his office. His tax amnesty return under P'D' 1840 did not disclose that the land sale to Ayala was in cash. Not having complied with the requisites, petitioner is not entitled to the benefits of P.D. 1740 and P.D. 1840. The mere filing of tax amnesty return thereunder does not ipso facto shield him from immunity against prosecution. Tax amnesty is a general pardon to taxpayers who want to start on a clean tax slate. It also gives the Government a chance to collect uncoilected tax from tax evaders without having to go through the tedious process of a tax case. To avail of a tax amnesty granied by the Government, and to be i.mmune from suit on its derinquencies, the taxpayer must have voluntarily disclosed his previouslyuntaxed income and rnust have paid the corresponding tax on such previousl.y untaxed income. A tax amnesrLy, much like a tax exemption, is never favored. nor presumed in law and if granbed by statute, the terms of the amnesty, like that of a tax exernption, must be construed strictly against the taxpayer and triherally in favor of the taxing authority. Hence, pet'itioner'e claim. af imr:lunity from prosecution under the sleieirl of avaiiing of a tax an:lnesl,y is untenable. O* ihe matter cf wl"ref,her t,ire land sale to Ayala should be cc)llsidered ils a cash sale or on instailment trasis, the prevaili.ng ru.le i r.il
Ir,
,\
t1,,. :rr.llor guarantees
its payment, cOntinues to colleCt on the
,I,rIl,r,cniobligation, or handles repossession of merchandise in r,'r. r)l clefault. Sin"u Philippine income tax laws are of American ,.r rl,rr, interpretations by American courts on our parallel tax laws Thus' by 1,,,u,^ l,.rrsuasive effect o.t th" interpretation of these laws' the wtren result disposition taxable a would more ,rilrrl(,g!, all the himself' seller the by is done note promissory ,1,',,',,,i'.ting of the ,1,.:rrly, the indebtedr"r. of the buyer is discharged, while the seller I r,,
,Ls money for the settlement of his receivables. Logically then, rl,,l income should be reported at the time of the actual gain. For ,rr'()nle tax purposes, income is an actual gain or an actual increase
,,,
,,1
,
1
,
,i
wt:alth. ,l'he
court thus ruled that although the proceeds of a discounted payment, still it must be s,r,,rnissory note is not considered initial ,,,,'luded. as taxable income in the year it was converted to cash' wlrcn petitioner had the promissory notes covering the succeeding rr,,rt,allment payments of the land isstred by Ayala discounted by Ayala itself on the same day of the sale, he lost the entitlement to rr.lrort the sale as a sale on installment since a taxable disposition ,,,sulted and petitioner was required by law to report in his returns ttrc income derived from the discounting. what petitioner did is lrrrrtamount to an attempt to circumvent the rule on payment of ilrcorle taxes gained from the sale of the land to Ayala for the year t1)-/6.
Lastly, on the award of damages, the Cotlrt found that the baseless and that said l,rosecuti-on against respondent Larin was .n,spondent sulfered urr*i"ty and humiliation due to the unfounded ,,l",arges against him. The Court thus found sufficient basis for the ,,*^id of moral and exemplary damages as well as attorney's fees' Irgt deleted the award for actual or compensatory damages for want of evidence on record to support the same'
E)MRCISES
1.
From what sources may tax exemption emanate? May tax
exemptionsexistbyimplication?Maytaxexemptionsberevoked? (1967 Bar)
To encourage the production of newsprint, the Rizal Paper Mill was accorded tix exemption privileges under R.A. 90,1 by virtue of which no internal revenue tu*"" "directly payable" could be
2.
141
LAW collected from (1972 Bar)
OI,- BASIC
it.
TAXATION IN THE PHILIPPINES
Is it likewise exempt frorn wharfage dues? Reasons.
3' The income earned by Denny santos in 1gg1 in the united states amounted to gb0,000 consisting of salaries, dividends, capitar gains from real estate transactions, etc. This income is subject to u.s. federal income tax and und.er our Tax code this income is also subject to the preferential rates of from r% Lo B%. Is this , double taxation ofthe direct type? Explain briefly. ";;;i 4. It is axiomatic in taxation that "tax exemptions are construed strictissimi juris." Does this rule apply also to the granting or ir* refunds as well as questions affecting the condona-tion of unpaid taxes? Explain your answer. 5. A certain corporation
was established to manufacture
prefabricated concrete slabs for export as well as local consumption. By way of tax incentive, the corporation was granted by law an exemption from all taxes "directly payable in respect to said industry', for the duration of its tax-exempt status which is five years. state whether the tax exemption granted to the corporationincludes the following: (a) payment of VAT (value-addea tax; on imported concrete, steel and other raw materials used in the manufacture of concrete slabs; (b) taxes on gasoline and other fuels needed. to operate its plant; (c) motor vehicle fees for the registration of its delivery trucks and panels; (d) community tax payable by the entity every year; and, (e) donor's tax on donated rand to be used as a site for another factory building needed for expansion purposes. The donation is made two years after the corporation had commenced. the actual operation of its business. 6. (a) "A," after studying his tax problems, decided to withdraw his bank deposits and to buy non-taxable or tax-exempt securities. Does "A's" act constitute tax evasion which is penalized? Explain. (1972 Bar)
(b) "B," who wishes to avoid payment of taxes assessable on the transaction, was advised by his tax consultant to make it appear on the deed of sale that the selling price was only?200,000 although it was actuallyft)00,000. Is this tax avoidance of tax evasion? Explain. (1972 Bar)
t42
Chapter
f!
TAX LAWS AND REGN.TLATIONS NA'I'URE OF TA)( LAWS. Tax laws are civil -in o"t"l, *ot (such 1,,,lrtrr'rrl. Hence, even during the period of enemy occupatioli FhiLippines the 11,r lor. instance, during the Japanese occupation of irr Wor'ld War II, which lasted from 1942 to 1945), tax laws are , ,,r,1
rrrrrally enforced as they are deemed to be the laws of the occupied
lr,i r rlory and not those of the occupying power.
Irr t,lre case of Hilad.o u. collector of Internql Reuenue, et ol. r I ilr I l,lr il. 288), the Court did not allow the taxpayer to deduct from lrr. l1)51 tax return a "casualty" loss incurred during the war, i.e., l,' l'r'otn fire, storms, shipwreck, etc., including war Iosses (now rilIl|r. sec. 34[D][1][b], 1gg7 NIRC). Although such loss was incurred ,lr, ru11 said war-it was not possible for him to make the deduction 1,, r;rilse, according to him, internal revenue laws were at the time ,lr(,llorceable Or in a state of suspension. The Court, however, ,,, r'r'r'uled this contention and held that during the Japanese ,,i i ul)irtion, the internal revenue laws of the Philippines continued t,,lrc in force. Neither are tax laws penal in nature. Hence, the'rule on the r,.t roactive effect of penal laws under Art.22 of the Revised Penal r ',,rle which reads: "Plnal law shall have a retroactive effect insof,ar rr:r (.hey favor the person guilty of a felony, who is not alabitual , runinal as defined in rule 5 of Article 62 of this Code, although at rlrc time of the publication of such laws a final sentence has been 1'ronounced and the convict is serving the same'" frnds no application rrr tax cases. As stated in a decided case (Lorenzo u. Pasados, Jr", ,'tc., 64 Phil. 353), revenue laws which impose taxes collected by rirc&ns which are ordinarily resorted to for the collection of taxes given rr rc not classed as penal laws and, therefore, cannot be rct,roactive effect.
Furthermore, tax laws not being penal in charactbr, the rutre in cannot be r lre constitution against the passege of er post /octo laws passage of er the prohibition against ,rrvoked. The constitutional only applies Court, Supreme the to post facto legislation, according civil concern which laws to not and penal matters, or i,o ""iminal or civil regulate or affect which generally, or procledings rnatters or 99 Phil. et ol., Fernandez, de Oassnvdd. u. private rights @epuUtii '934; Ex Pirte Garlond, 18 Low Ed- 366, 16 C'J'S' 889'891} 143
r
,I'AX I,AWS AND RI']GULAI'IONS
LAW OF BASIC TAXATION IN TTIT] PHILIPPINES
Moreover, it was also held that the constitutional prohibi against ex post focto laws is not applicable to the collection of interort on back taxes, nor to laws which, as stated concern civil mattorl generally or regulate civil or private rights. The collection of interort in tax cases is not penal in nature (Central Azucarera de Don Pedro u. CTA, et ol., L-23236 and L-23254, May 31, lgif). Increased tax rates may also be given retroactive effect so as to apply to income earned before the passage of the law authorizinj such increase. As in the case of interest, no constitutionai infringement would exist anent the ex post facto prohlbition.
INTERPRETATION OF TAX LAWS. It is a well-settled rule in taxation that a statute will not be construed as imposing a tax unless it does so clearly, expressly and unambiguously. A tax cannot be imposed without clear and express words for that purpose.
Accordingly, the provisions of a taxing act are not to be extended by implication (Marind.uque lron Mines Agents, Inc. u, The Municipal Council of the Munictpality of Hinabangan, Frouince of Samar, L-18924, June 30, 1964). Furthermore, in errery case of doubt, tax statutes are construed most strongly against the Government and liberally in favor of the citizen because burdens are not to be imposed beyond what the statutes expressly and clearly import (Collector of Internal Reuenue u. La Tondefi,o, Inc., et al., L-10431, July 31, 1g62; see also Commissioner of Internal Reuenue u. Fireman's Fund Insurance Co., et a1,., L-30644, Mar. 9, 1987; Commissioner of Internal Reuenue u. Court of Appeals, et al., G.R. 115349, Apr. 18, lggT; Lincoln Philippine Life Insurance Company, Inc. u. Court of Appeals, et al., G.R. No. 118043,Ju|y 23, 1995). Aithough, tax burdens are not presumed, it is important to consider, however, that tax laws are not promulgated in order to encourage tax evasion or tax avoidance. Thus, in one case, the Supreme Court said that the purpose of the Tax Code is to impose taxes, not to enhance tax avoidance (Commissioner of Internal Reuenue u" Phoenix Assurance Co., Ltd., L-I9903, May 20, l965). In this connection, it should be noted also that like other statutes, tax laws operate prospectively whether they enact, amend or repeal unless the purpose of the legislature to give retrospective effect is expressly declared or may be implied from the language used (Philippine Educatian Co. u. Commissioner, CTA Cqse No. Z0S, Sept. 20,1965 citing Lorenzo u. Posadas, Jr., etc., supra; Commissioner of Internal Reuenue u. Filipinas Cia. De Seguros, 5S O.G. No. J, p. 460). 144
are Ir,rr,,1' lrr ttltrop{ls to mention that since our income tax laws
,,,,,n t,rigin, interpretations by American courts on our (Baft'os' Jr' u' Court of i,e,, ll, I t,,* lrrw-s lraru peisrasive effect
,,1 ,irr,, '1,,1,,,,/
'. ,'t trl., (i.R- No. 102967, Feb' 10,2000)'
:iulrlt(;l,ls OF TAX LAWS. The following may
be said to be
()l'tax laws: ('orrsIitution
*1r,. ,,,,'rr r'(':t
t :,
the National Internal Revenue code, Tariff ,rrrrl ()ustoms Code, and portions of the Local Government
,l,rr
(
.t
x qrdes such as
lrrrle
ljlntutes like R.A. 1125 (An Act Creating the Oourt of Tax Appeals), R.A' 7?16 (E'VAT Law), and R'A' 8424 (Tax Reforrr
of 1997) l'residentialdecrees l'lxecutive orders
Act.
t t, t; t n
(-lourt decisions
Ilevenue regulations promulgated by the Department of Finance Adnninistrative issuanees of the BIR like Revenue Mernorandum Circulars, and those of the Bureau of Customs like Customs Memorandum Orders
1) tsIR ruiings t0. L,ocal tax ordinances I I " Tax treaties and conventions with foreign countries" MANDAToRYANDDIBECTORYPR0VISIoNS.TheTeaTe mandatory l,rovisions in existing tax laws w-hich lay down performed acts certain ,,..1.,irements for purpoJes of the validity of laws. l,y those who are entrusted with the enforcement of revenue 'lihese are known as mandatory provisions'
1977 For instance' a mandatory provision in the Tax Code of summary a As property. was sec. 20? therein on the distraint of .,,*edy in tax collection, the law then required that the same should t," employed,,not earlier than three months nor later than six months of the demand." It shouid be observed' however' that r,-o* """"ipt onlythethree-monthperiodasabovestatedismandatoryinasmuch not be as the admonition that summary collection sf taxes should directory a only is Iater than six months from date sf dernand provision. In other words, should collection be instituted beyond l.4t)
r I,AW OI.' I}ASI(],I'AXAl'I0N IN'I,I I I) I)IIII,II)I,INI.]S
the six-month period provided in the law, such actio' will necessarily result in the nullity of the collection. There was, however, no need for the Bureau of Internal Rev.r, allow three months from date of receipt of assessment to errr; before summary re,redies for collection ar:e resorted to, if ther being collected is a self-assessed tax, as in the case of the inc tax, which the taxpayer reflects in his tax return, but which he fail to pay on the date for payment prescribed by law. The three-morr period applied only when there was a previous demand or assessm() from the BIR. Sec. 207 of the lgg' NIRC, as amended, no longer provides lo! the mandatory period of "not earlier than three (s) months,, beforg the BIR could use the summary remedy of coilection or""y iJirqr"nt prop"rty, !,1I bV distraint of personal property andlor levy on What is now mandated by the iaw is that upon failure"eut of the person owing any delinquent-revenue to pay the same within the period prescribed by law, the Commls.lorre" or his duly authorized representative shall seize and distrain personal prop"rty and/or levy real property of the derinquent taxpayer in sufficieni qu,^.ntity t, satisfy the tax charge together with any increment thereio incident to delinquency. Another example of a directory provision is Sec. 12 of R.A. ._ 112b (the law creating the court of raxAppeals, effective June 16, 1gb4) which provides that cases brought blio"u the court shall be decided within thirty days after submission thereof for decision (Lidd,er & Co., Inc. u. Collector of Internal Reuenue, L-g6gf, June 50, lg61). The crA is not a rnere superior ariministrative agency or tribunal; rather, it is a part of the judicial system of the ntitipirnes. It was created by congress as a centralized court specializing in tax cases. It is a regular court vested with excrusive appellate jurlsdiction over cases arising under the National Internal Rurru.,rru Cod.e, Tariif and Customs Code and the Assessment Law. As a matter of practice and principle, the supreme court will not set aside the conclusion reached by the crA which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily deveroped an expertise in the subject, unless there has been an abused and improvident exercise of authority on its party (commissioner Internal Reuenue u. CTA, et al., G.R. No. 1041i1,-Mar. 10, lggS). af bo
t46
'fAX I,AWS ANI) Itlrl(l[Jl'A'l'IONS laws l'l I ltl,l(lA'l'tON REQUIREMENT' Not ail sources of tax as Gazette Official in the r- r , ,rrr, r'rtlt'(l itbove r"qt,i'u publication states that "(I)aws shail 1r,' ,,t,,1 rrr Art'. 2 of the'cirrit'cod", which the completion of their ral., ,ll, r'l rtt't,u. lifieen days following Gazette unless it is otherwise provided'" ,,,,', ,,, ,lr,rtt itt the Official ol' (G'R' ll,rr:;, trr t,he case of Tafi'ad'a, et q'l' u' Tuuera' etc'' et require following the that ri,, i, ri)1i,, l)ec. Zg, iggOl, it was ruled including statutes,' for their effectivity: ;:r1l,lr, ,rlror) us u
"orrJilio,,md private laws' presidential decrees and ,, ,,1 l,t:irl applicuiiorr Presid'ent' and administrative e ,' r r , t r u,' o rd ers promulgatea Uy tt'u lrl, rrrrrl regulations iitheir purpose is to enforce or implement , ,, r Iurli Iltw, pursuant to a valid delegation' are merely internal l rrt.t'lrretative regulations and those which personnel, of the the only ,, ,,,,1rr.., i.e., thos? which regulate not be published need public' ,,,lr,,rrr.;t,t'ati,r. usu;"y u,tJ "ot ihe following do not the instance' ilt',,1) (lonsequentfy, l" lhe BIR for Revenue effectivity: of , , ,,,,,,',' publlcation for purposes Revenue Circulars' i\1, rrlrr';rndum Orders, Revenue Memorandum rulings' \,lrrrrrrst.rative Orders, and BIR Circular was ruled as one which I rr one case, a BIR Memopandum and not a regulation 1 , ,, r I y tbr the internal admiiristration of the BIR and' therefore' Code theTax of 245 , rrl,rrr the contemptullo,, of Sec' Cigar and (La Suerte Gazette rri, rlr; t)o publicatron-i" tftu Official Alhambra and L-36130' al'' et CTA' I ti:tu'ttlte F'actory, "'ol' '' jointly decided on l,,,lrt:;lries, lnc., et ol. u' CTA, et ol'' L'36131' t, t rt t 7, 1985). by means of When an administrative agency renders an opinion a pre-existing law ,r i.rr.cular o, -u*orundum itLerely interprets Arca' (Romualdez 1.r(l rro publication is required for its validity -u' Cigarette tn La Suerte Cigar & , t t, t)t al., L.2 5924, Apr. 18, 1 969, cite,J, ' supra)' al', et l"ttt'Lory, et al. u. CTA, ruled that ln one case involving the Bureau of Customs' it was (,rrs[oms Memorandrrri Ord"r, issued by the Commjssioner of
111,,
(.llsLomsneednotbepublishedintheofficialGazette(Yaokasinu' 22' 1989)' t'rtmmission", o1Cu,[o*s, et al'' G"B' No' 84111' Dec' of the Incidentally, construction by an executive branch courts' tfe o1 not binding t lovernment of a particular law, although comes from the branch of construction tf'" u" *"ighf girr"n rrrust be (Ibid.). tlre Government ciued upon to implement the la'w
147
TAX LAWS AND REGULATIONS
LAW OF BASIC TAXATION IN THE PHILIPPINE$
ARE TAX LAWS SPECIAL LAWS? Tax laws are special The Tax Code is an example of a tax law. According to one case, the Tax Code is a special law and prevails over a gen such as the Civil Code (Republic u. Gancayco, L-18307, Jw 1964). But in case the provisions of a special law are found deficient in a particular situation, the Civil Code shall ap Art. 18, Ciuil Code). Tax laws treat of a special subject, i.e., taxes. Hencg publication of a Iocal taxing ordinance enacted pursuant to the Local Tax Code (P.D. 231, as amended) which requires publi only after the approval thereof, even though the particular of the city in which the ordinance was enacted requires publi before and after its approval, was considered validly promu In one case, the ruling was to the effect that although the Charter of Manila speaks of ordinances in general, irres the nature and scope thereof, Sec. 43 ofthe former Local Tax on the publication of tax ordinances should apply because the Tax Code relates to ordinances levying or imposing taxes, f charges in particular (Bagatsing, etc., et al. u. Ramirez, etc., et L-41631, Dec. 17, 1976). In an action, instituted by the Gauernment for the recouery of erroneously refunded ta.x, which prescriptiue period will apply * six-year prescriptiue period for quasi-contracts under Art. 1146 the Ciuil Code, or the three-year prescriptiue period for assess uruder Sec. 223 of the Tax Code which is a special law? The ar,s to this question is, since an action to recover an erroneously refu tax is in effect an assessment of such tax, and considering that special law like the Tax Code prevails over the Civil Code, a Iaw, then it is the three-year period under the Tax Code that apply (Guagua Electric Light Co., Inc. u. Collector of Intern Reuenue, et al., L-23611, Apr. 24, 1967). TAX REGULATIONS. Tax regulations are promulgated by Secretary of Finance in order to implement the provisions of t Tax Code. Sec. 245 (now, Sec. 244 of the 1997 Tax Code), provt that "(t)he Secretary of Finance, upon recommendation of t Commissioner, shall promulgate ail needful rules and regula for the effective enforcement of the provisions of this Code. Regulations must not be contrary to law for a regulation promulga on a wrong interpretation of the Iaw or in contravention cannot give rise to a vested right that can be invoked either by the taxpayer or the Government (Quiazon and. Lukban, Philippine Income Taxation, p. 18). They must be published in the Official 148
:le rrr in e newspaper of general circuiation (B'O' 200)' They within Ire r0rtsonable (Quiazon and. Lukban, op cit') and must be Brrllroril,y conferued since the power to make regulations is not guise of regulation, Iegislation ltilwrtr to legislate. under the regulations have the force (bid). Administrative onacled Irrrt,lrrr pl,lirr:L of law (valerio u. secretary of Agriculture q.nd Natura'l r*,s, L-18587, APr. 23, 1963). be trYell n(Jttled is the rule that administrative regulations must discrepancy of [xrrrr,,,:y with the provisions of the law. In case pilil the basic law and the implementing rule or regulation, the er lrrcvails (Philippine Petroleum corp. u. Municipality of Pililla, tl, it ol., G.B. No. g0776, June 3, 1991). Rules and regulations with rl, rtol override, but must remain constant and in harmony modify nor law they seek to apply. They must neither supplant lnw (Commissioner of Internal Reuenue u' Court of Appeals' ttl,, (;./?. No. 108358, Jan' 20, 1995; Republic u' Court of Appeals' u,,, (j".1?. No. 109193, Feb. 1, 2000). 'l'lttts, in Phitippine Bank of Communications u' Commission'er the Supreme U{ lntt'rnal Reuenue (G.R' No. LL2O24, Jan' 28, 1999), by regulations revenue flrrrrrt ruled against the relaxation ofcertain
Mernorandum Circular No. 7-85 (RMC 7-85) as it tlhr,,gflrded the 2-year prescriptive period set by iaw. Said the Court, i,l*tt,,,,, the Acting Commissioner of Internal Revenue issued RMC years on 'f Hlr, r:hanging the prescriptive period of two years to ten created circular t|lnt|ils of excess quarterly income tax payments, such NIRC. 1977 the 230 of 6 1,1,u r inconsistency witir the provisions of Sec. it rather' law; lir rr,, doing, the BiR did not simply interpret the Congress'" passed by l+'girlated luidelines contrary to the statute ,l,he court thus upheld the nullification of RMC 7-85 as an "nrlrrrinistrative interpretation which is not in harmony with
!rr,,,,,,"
the 1977 NIRC, for being contrary to the express provision u!'rr statute," and concluded that the same "could not be given weight lirr t,o d.o so would in effect amend the statute"' Moreover, the internal revenue commissioner cannot' by turlrninistrative fiat, amend. the Iaw by making compliance therewith Irrore burdensome (Atlas Consolidated Mining and Deuelopment {irtrporation u. Commissioner of Interrtal Reuenue, G'R' No' 133467' Nou. 17,1999). Ht,t,. 230 of
TAX RULINGS. Administrative rulings have been aptly
rloscribed as follows: "They are the best guess of the moment and rrrcidentally often contain such weil-considered and sound Iaw; but
r49
rr
LAW ol,' llASl(t 'l'AXA'l'lON lN ,I,lt Ll
t,llll,lt,l,lNllS
the courts have held that they do not prevent an entire change of front at any time and are merely advisory * sort of an information service to the taxpayer" (euiazon and. Lukban, op cit.). POWER OF THE COMMISSIONER TO INTERPBET TAX LAws AND To DECIDE TAx CASES. sec. 4 of the 1992 NIR0 specifically provides that the power to interpret the provisions of
the Tax code and other Lax laws shall be under the excrusive and original jurisdiction of the commissioner, subject to review by tho secretary of Finance. The power to decide dilputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto or other matters arising ,rd"" ihr. codu or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the commissioner, subject to tho exclusive appellate jurisdiction of the Court of Tax Appeals. The opinion or ruling of the commissioner of Internal Revenue, the agency tasked with the enforcement of tax raws, is accord.ed. much weight and even finality where there is no showing that it is patently wrong, particularly in a case where the findings and conclu"ions of the internal revenue commissioner were subsJquentry affirmed by the crA, a specialized body created for the excrusive purpose of reviewing tax cases, and the court of Appeals (Afisco Insurance Corp., et al. u. Court of Appeals, et al., C.A. .l/o. llZ6fS, Jan. 25, I 999). Rulings which merely embody administrative opinions on queries submitted do not have the force and effect of law s (Alexand,er Howd.en ctnd Co., Ltd. u. Collector of Internal Reuenue, L- l gSgZ, Apr. 14, g6i). l
NON-RETROACTIVITY oF RULINGS. Generalry, rulings are not retroactive if they are prejudicial to the taxpayer. sec. 246 of the 1997 NIRC provides: "Any revocation, modification or reversal of any of the rules and regulations promulgated in accord.ance with the preceding sections or any of the rulings or circulars promulgated by the commissioner shall not be given retroactive apprication if the revocation, modification or reversal will be p""j"ai"iut to the taxpayers, except in the following cases:
"(a) where the taxpayer deriberately misstates or omits material facts from hisreturn or any document required of him by the Bureau of Internal Revenue; "(b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or 150
'l'AX l,nWS
n
Nl) ll,l,)(itlt,n'l'lONSi
)
Wlrcrc t,hc taxpayer acted in bad faith." lrr tlrc t::rso of Beruguet Corporatiott, u. Commissioner (CTA Case !i,, I'ttt)'/, [ob. 14, 1996), the Court held that the retroactive ',1,1,111 ;qliorr of VAT Ruling No. 8-92 will not be prejudicial to the l.r 1t,r1'('r' urrder the aforequoted exception to the general rule. \ r';rsc which illustrates the non-retroactivity of BIR rulings is | ,,rrnt:;:;ioruer of In.ternal Reuenue u. Buruoughs Ltd., e, ol. (G.R. Il', r;(i(il-):], June 19, 1986). In that case, there was a BIR ruling 1, 'r,.rl ,rrr.Ian. 21, 1980 wherein it was ruled that the 15% branch t,r,,lrl rrrnrittance tax under Sec. 25(a)(5) of the Tax Code should be l,'r ,.rl on the amount of profit actually remitted by a Philippine l1r,,rr, lr t,o its parent company abroad. However, in 1982 under li, r'r'nuc Memorandum Circular No. 8-82, the BIR reversed the prior r, r I r r1,, rr nd held that the 15% branch profit remittance tax should be l,,r,,,rl not on the amount of profits actually remitted but on the ,,r,,(,rInl, applied for remittance thereby making the basis of ttre LSyo t,,i l;rrger than that on which said tax was computed under the ,,,,1,,nirl 1980 ruling. The BIR in its subsequent ruling in 1982 r, .'rrrrod that the amount applied for remittance should be the tax l,,r r,., t.hus giving rise to a bigger amount of tax. 'l'lre question here, however, is: will the reuersal ruling in 1982 t, trrttlct to the braruch profit remittances made before thot yeclr or, qs t tt tltc cas€ of Burroughs hereiru, will said ruling apply to remittances 'tt,rrle by it in 1979? 'l'he Supreme Court ruled that the payment of the branch profit r, rlril,tance having been made on Mar. 14,1979, it follows that BIR Nlr,rrrorandum Circular No. 8-82 issued on Mar. L7, 1982 cannot be 1r\,(,n retroactive effect (Cf.. Bank of America NT & SA u. Court of t1,1teals, et al., G..R. No. 103092, July 21, 1994). ln another case, the Court of Tax Appeals held that it is a settled r u lc in this jurisdiction that the administrative rulings of previous ( ',r rrrmissioners are not conclusive and binding upon their successors. ,\rr incumbent Commissioner may revoke, reverse or abrogate the rrr'(5; s1 rulings of his predecessors in office if he becomes convinced t lrrrt a statute warrants a different construction (Antonio Tuason u. t ,itt,gad, CTA Case No. 1398, June i6, 1965 citing Hilado u. Collector ,,f lnternal Reuenue, et al., 100 Phil. 288; Collector of Internal Reuenue r,. Manila Lodge No.761 of the Beneuolent & Protectiue Order of l,lllt,s, et q.1., 105 Phil. 953). This principle is, however, subject to the ron-retroactivity rule should it appear that the ruling reversing a lrrevious ruling of the former Commissioner is prejudicial to the lirxpayer pursuant to Sec. 246 of the Tax Code. More recently, the (,
r
151
r
I,AW O}' I]ASIC'I'AXAl'ION
IN'IIlI]
Supreme Court reiterated the rule on non-retroactivity of BIR rulinpgu in Commissioner of Internal Reuenue u. Court of Appeals, et al. (G.ll. No. 117982, Feb.6, 1997).
It would seem however, that if a subsequent ruling revokes I prior ruling on the ground of nullity, the same being erroneous and contrary to existing law, there might be a basis for giving tho subsequent ruling a retroactive application. LEGISLATM ADOPTION OF TAX RULINGS. There aro instances where the legislature may have approved tho interpretation of tax statutes by administrative agencies through reenactment. This is known as the the principle of legislatiue appraual of aru administratiue in terpretation through reenqctment and may be briefly described thus: Where a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged with its enforcement and the Iegislature thereafter reenacts the provisions without substantial change, such action is to some extent confirmatory that the ruling carries out the legislative purpose (Alexander Howden. and Co., Ltd. u. Collector of Internal Reuenue, supra). It may be mentioned in this connection that Sec. 28(,{)(5) of tho 1997 NIRC now clearly provides that the 75o/o tax on branch profit remittances shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof, except those activities which are registered with the Philippine Economic Zone Authority (PEZA). In effect, the revocatory ruling issued by the Commissioner in 1982 in the Buruoughs case regarding the basis for the computation of the 15% branch profits remittance tax is confirmed by the legislature with the reenactment of the adrninistrative ruling in the 1997 Tax Code. It is also settled that the reenactment of a statute substantially unchanged is persuasive indication of the adoption by Congress of prior executive construction (ABS-CBN Broodca.stirlg Corp. u. CTA, et q.1., G.l?. No. 52306, Oct. 12, 1981).
DOCTRINE OF IMPLICATIONS. The doctrine of implications means that that which is plainly implied in the language of a statute is as much a part of it as that which is expressed (City of Manila, et al. u. Gomez, etc., et al., L-37251, Aug. 31, 1981).
It was ruled that where R.4.5447 (creating the Special Education Fund, or SEF, which imposes a 1% additional tax on real property; now, found in Sec. 235, Local Government Code), in levying the L% t52
,I'AX I^WS
PHILIPI'INITS
N
ND ITIICUI,A'IIONS
,r,l,lrl ronul rcal estate tax provides that "the total real property tax ,,l,,rll rrot, exceed a maximum of three per centunl," the cityof Manila, ,rrr,l,.r.rt,s charter, can increase the existing regular rate of one and ,,rr,. lrrrlf'per cent to two per cent; so that t]ne 2o/o added to the 1%
' ,r,rrlri
il(t/o,
or the maximum rate allowed trnder R'A' 5447'
,I'AX TREATIES AND INTERNATIONAL AGREEMENTS' of l'ir r l.rgnties or conventions also constitute an important source one is objectives. iwo tir \ lirw. Tax treaties ordinarily comprehend taxed is income the I ,, il,,,0ir1 double taxation especially in cases where r\\',,,: one by the countrywhere the income is earned (country of ,,,,rr|r'r') and another by the country where the subject of baxation is , rt lr.r'rt citizen or resiient (country of residence)' Another objective of the r , I ,, r,liminate or minimize tax evasion through the adoption to countries signatory , , l rr rtge of information scheme whereby the basis mutual a on r1,,. l,re-aty undertake to furnish each other ,r,l,,rrnation on the taxable income and/or activities of any of their rr;r I ronals or residents. ,l,he Phiiippines has entered into a number.of tax treaties, notable ,,t rvhich are those with European countries, the united states and \lil,lAN, or the southeast Asian nations like Indonesia, singapore, Nl rr I rrysia, and others. lnCommissioneroflnternalReuenueu.S.C'Jahnsort'andSon, tr^', et ol. (G.R. No. iZZlOf, June 26, 1999), the Supreme Court ,'rlr;rustively expounded on the purpose and desired effects of tax ,,x x x The purpose of these international agreements is to I r |rrt,iesi in ,,.,.oncile the national fiscal legislations of the c
r
Incidentally,ontheratificationoftreaties'theConstitution
r.r,quires the concurring vote of at least two-thirds of all the members 153
t,AW ()1,. uAStc .tAxA.I't0N
IN'fl
1
bt
i)Hlt,l t,plNUS
of the Senate for validity and effectivity (Sec. 21, Art. Vll, 1987 Constitution). Despite the aforesaid constitutional requirement, our supremo court has ruled that r.ess formar types of i"ie"rrtioruiig"u"-"nt* may be entered into by the chiei Executive and becom-e binding without the concurrelc_e of the regislative rrai rCi*-missioner ol Internal Reue,.ue u. John Gotamco & Sons., iir.,-rt-",i.", L_S10gZ, Feb. 27, tgSf). That being the case, the Host Ag""Lrrr"r,i'tf July 22, 1951 between the philippines and the world ri""i;h o;;anizarion (wHo) under which th_e wHo is exempt from indirect taxes rerative to the construction of its regional headquarters building in tho Philippines comes within the ratter category. The court held that said agreement is a varid and binding agreement even without the concurrence of the senatg{Ibld., citing usarrn veterans Association Inc. u. Treasurer of the philippiner,lAs phil. 1050) CASES
REPUBLIC v. OASAN VDA. DE FERNANDEZ, ET AL.,
99 PHIL. 934
FACTS: Oiimpio Fernand.ez and his wife, Angelina
Oasan, had. a net worth of p8,600 on Dec. g, 1941. Duriirg th"-Juprr"r" occupation, the spouses acquired several p"opJrties and at the time of his death of Feb. 1i, 194b, he had""ai a net worth oirgt,+gg. The collector
of Internal Revenue assessed a war profits-tax on the estate of the deceased atF2,614.60 which his adminis;;; refused to pay. The case was brought to the Court of Tax
6;;ir, which sustained the validity and legality of the urr".rrri"rrtr. The administratrix of the estate appealed the decisio" to trr" srpreme court. The issues raised dweli on the folrowing: iil ,rr"-q""rtion on the constitutionality of the war profits tax with particular reference to its retroactive nature; (2) the appiicability of said tr. t" the case of olimpio Fernandez as the ru*L^i" imposed on individuals; and., (3) the separate taxation of the estate of the deceasei orimpio Fernandez apart from that of his wife's becausooii;;;e""andez
died before the law levying said tax was passed.
HELD:
The issue of unconstitutionality of the war profits Tax
Law raised by the appellant is based o, ih" prohibition against the passage of ex post factolaws. This prohibition, hower-"", ,pptiu. only to criminal or penal matters, and not to laws which concern civil matters or proceedings generally, or which urru"t o"'"ugulate
t
154
'I'AX I,AWS AND ITI]CULATIONS r
l'rl
(,r'
16 C'J'S' lrrivate rights (Ex Parte Garlan'd', 18 Law Ed' 36;
,i:;,t ,\ll I ). ,l'lrc t:ontention that the deceased Olimpio Fernandez or his estate ,rlr,rrlrl rtot be responsible because he died in 1945 and was no longer is absolutely w hen the law was enacted at a later date in 1946 I i ,. r r r
1i
,n,rl,.,rrl merit. Fernandez died immediately before the Liberation ,lrrl thc actual cessation of hostilities. He profited by the war;there estate ilr n{) r.cason why the incident of his death should relieve his I r ,,rrr l,lre tax. 'l'lre properties of Olimpio Fernandez in December 1941 and those ,,,,,,,,roi during the war ur" p""tr*ed conjugal' Hence' there is no individuals (husband and 1,,,,,,,,,1 to tax ih"* u. belonging to two w rlr') us so to be taxed independently of each other'
(.()MMISSIONERoFINTERNALREVENUEv.BURRoUGHS' l,'t't)., ET AL., G.R. NO.66653, JUNE 19' 1986 to ITAGTS: Burroughs Ltd. is a foreign corporation authorized it applied In in the Phiiippines' -1979' ',rtiirge in trade or birsiness parent ,u,il, th" Central Bank for an authority to remit profits to its 28[A][5]of (now, Sec' , rrlrf)Brl1l abroad. Pursuant to Sec. 24(bx2xiii) rt,,' tgdT Tax Cod.e), it remitted the amount of F6'499'999'30 ,
,,rrrputed, as follows: Amount applied for remittance
Deduct: Branch profit remittance tax of l5%
Net amount actually
"""" fl'64?'058'00
.""""" """"'
"""""'
remitted....""
1'147'058'70
f6'499'999'30
Consequently, the company filed a claim for refund of that l, I 72,058.81, as overpaid branch profit remittance tax, claiming amount tlrc 157o tax should be based not on P7,647'058'00' the
,rpplied for remittance, but onP6,499,999'30, or the amount actually
rcrnitted, computed as follows: Branch profit remittance tax paid at t|o/o of ?1 '647' 058 00
" fl'147'058'70
Less: Branch profit remittance tax as computed (t5% of P6,499'999.30) ..'.'."' """""'
974,999.89
F
Total Amount Refundable
172,058.81
profit The issue raised in the case is: Should the 15% branch profit of amount the on computed question be lemittance tax in 155
r
t,AW OI.'BASIC TAXATION tN THE pHILtpl,lNIJS
applied to be remitted abroad (i.e., the sum ofp7,64Z,0bg.00), or tho profit actually remitted in the amount of ?6,499,9g9.80?
HELD: The rb% branch profit tax should be based on the amount of profit actually remitted. It should be noted that in a ruling dated Jan. 21,1980, the BIR ruled that the 1b% remittance tax is on the profit actually remitted abroad and not on the totai branch profits out of which the remittance is to be made. This ruling was, however, subsequently revoked in Mernorandum circular No. s-az *hi"h Lr"ld that the 15% branch profit remittance tax is imposed. and collected at source so that necessarily the tax base should be the amount actually applied by the branch as profit to be remitted abroad. But even inspite of this subsequent ruling, the applicable ruling is that which was issued on Jan. 21, 1gB0 o., a."or,,.rt of the non-retroactivity rule in sec. B27 (now, sec. 246) of the Tax code, which provides that the reversal rulings of the commissioner are not to be given retroactive effect ifprejudicial to the taxpayer, except in any of the three exceptions mentioned. therein. The payment of the overpaid remittance tax having been made on Mar. r4-, lg7g, it follows that Memorandum circular No. 8-g2, dated Mar. 12, 19g2, cannot be given any retroactive effect. BANK OF AMERtrCA v. COURT OF APPEALS, ET AL., c.R. NOS. 103092 and 10310G, JULY ZL,tgg4 FACTS: Petitioner, a foreign corporation licensed to engage in business in the Philippines, paid the lbo/o branch remittance tax on profits from its regular banking dnd foreign currency unit operations totaling P1,984,250"97 based on net profits after income tax without
deducting the amount corresponding to the 1b% tax. It later filed a clairn for refund with the BIR of that portion corresponding to the 15% branch profit remittance tax arguing that said ts% tai should be assessed on the amount actually remitted abroad, per sec. 2aft)(2)(ii), NIRC. The commissioner of Internal Revenue contends otherwise, holding that the 1b% remittance tax should be inclusive of the st:.m deemed remitted. The CTA upheld petitioner bank's claim for refund, but said decision was reversed by the Court ofAppeals.
HELD: Not much reliance can be placed on the ruling in Burroughs Limited u. commissioner of Iruternal Reuenue, et al. (G.R. No. 66653, June 19, 1986) for the conclusion reached in that case was grounded more on non-retroactivity of rulings. 156
'l'Ax t,nws n ND ltlrciul,A'l'loNS l,lr,, l:rx ltaid or withheld in case of ad ualorem taxes is not t, ,lrr, t,.,1 l'rlrrr l,he tax base because the law, in defining the tax base ,,,,,1 ur 1r'ovitl ing for tax withholding, clearly speils it out' However' rl,, ,( r;i nrrt,lring-in Sec.24(bx2)(ii), NIRC (now, Sec' 28[A][5]' 1997 ,; t t;t ,^ ), which indicates that the lsYotaxon branch profit remittance r,,,,rr llr0 l,oLaI profit to be remitted abroad' In the 15% remittance r,r, llr,. lrrw splcifies its own tax base to be on the "profit remitted ,rl,r,,,r,l " 'l'here is absolutely nothing equivocal or uncertain about rl,, l;rnllrilge of the provision' The tax is imposed on the amount ,, ,,1 ,,1,,.r,aJ, and the law then in force calls for nothing further.
'lV /J.: Sec" 28[A][5], 1997 NIRC, on branch profit remittance l,r
r now llrOvideS "15) I'ax on. Branch Profits Remittqnces'- Any profit r,.rrritted by a branch to its head office shall be subject to a on the total I ;r x of fifteen percent (15%) which shall be based any without remittance for earmarked or applied 1,r'o['its ,1,'rluction for the tax component thereof (except those ,rt'tivities which are registered with the Philippine Economic Z,,ne Authority). The tax shall be collected and paid in the :i;une manner as provided in Sections 57 and 58 of this Code
\xx"" t ()MMISSIONER OF INTERNAL REVENUE v" COURT OF \ l't,trALS, ET AL., G.R. NO. 108358, JAN. 20, 1995 ttAcTs: on Aug" 22,1986, E.O. 41 was promulgated declaring a ,,rr, l,ime tax amnlsty on unpaid income taxes, and was later ,,,,r,,rrded to include estate and donor's taxes as weII as taxes on l,rr:rrness for taxable years 1981 to 1985' l,rivate respondent R.O.H. Auto Products, Philippines, Inc. ,rVrril€d of the amnesty in october and November 1986 by filing its ,\rrrrresty Tax Returns and paying the corresponding amnesty tax ,1,r,,. pritr to such availment, the Commissioner of Internal Revenue ;cSS€d. private respondent its deficiency income and business taxes l,,r'fiscal years endld Sept.30, 1981 and Sept' 30, 1982' Private r,'r;pondent responded that since it availed of the tax amnesty' the lr.ll,er assessments shouid accordingly be withdrawn' The t lornmissioner denied the request on the ground that Rev' Memo ()rder No.4-8?, dated Feb,9, 1987, implementing E'O' 41' had , r r
ir
,.,rnstrued the amnesty Coverage to include only assessments issued l,y t,he BIR after the promulgation of E'o. 41 and not to assessments
t57
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,IAX I,AWS AND R!]GULATIONS
LAW OF BASIC TAXATION IN THE PHILIPPINES
theretofore made. Both the favor of the taxpayer.
crA
and the
court of Appeals ruled in
HELD: while the authority of the secretary of Finance, in conj,nction with the commissioner of Internal Revenue, to promulgate all needful rules and regulations for the effectivo enforcement of internal revenue raws cannot be controverted and
such rules and regulations as well as administrative opinions and rulings deserve respect by the courts, however, all such issuanceu must not override, but must remain consistent and in harmony with, the law they seek to apply and imprement. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law. E.o. 41 is explicit and requires hardly anything beyond a sirnple application of its provisions. E.o. 41, in its exclusionary clausls, did not include the 1981 to 19gb tax liabilities already assessed. said executive order has been designed to be in the nature of a general grant of tax amnesty subject only to cases specifically excepted by it.
COMMISSIONER OF INTERNAL REVENUE v. COURT OF APPEALS, ET AL., G.R. NO. 119761, AUG. 29, 1996
FACTS: The Philippine patent office issued to private
respondent Fortune Tobacco corporation (Fortune Tobacco) separate certificates of trademark registration for ,,Champion,,, *Hope," and. "More" cigarettes. It was the position of the commissioner of internal Revenue that said cigarette brands should be classified as foreign
brands since they were listed in the world robacco Directory as belonging to foreign companies. Fortune Tobacco changed the name of "Hope" to "Hope Luxury," and ,,More,' to *More premlum,, thereby removing them from the foreign brand category. R.A. 7654, amending Sec. 142(c)(1), NIRC, was enacted and became effective on JuIy B, 1gg3. A month later, Revenue Memorandum circular No. BZ-SB (RMC Bz-98) was issued by the BIR categorizing "Hope," "More,,, and ,.Champion', as locally manufactured cigarettes bearing a foreign brand subject to blo/o ad. ualorem tax. A copy of EMC 87-93 was sent by fax to Fortune Tobacco without being addressed to anyone in particular. on July 15, 1g98, a certified xerox copy of RMC 37-gB was received by Fortune Tobacco. On July 19, 1993, Fortune Tobacco wrote the BIR appellate division for a review, reconsideration and recall of RMC gz-93, and on the following day, the BIR assessed Fortune Tobacco an 158
,*tl t'atlttt'(tn tax deficiency of P9,598,334. l",,r.l rrno'I'obacco filed a petition for review with the CTA on .\rrs. .1, l1)94. The CTA ruled in favor of Fortune Tobacco and the ,1r,, r,rrorr 1[the tax court was affirmed by respondent Court of Appeals' t
i ti L
I):
The Supreme Court sustained the ruling of the appe trlate
rrrrrl lrrx ctlurts.
'l'lrcrc is no doubt that the BIR has wide and ample authority in tlr |irirrance of rulings for the effective implementation of the t,rr'\'r;rons of the NIRC. Like any government agency, however, the L,,lrtrssioner of Internal Revenue may not disregard the legal 1r.r1urr.('11e1ts ,1,r,',,r
and applicable principles in the exercise of its
lcgislative powers.
i\ reading of RMC 37-93, particularly considering
the
, r , r ulstances under which it has been issued, shows that the circular ,.ilrilot be viewed simply as a corrective measure (revoking in the as t,,o(.(,ss the previous holdings of past Commissioners) or merely as NIRC)' 1997 (now, 145, See. ,,,rr:;lruing Sec. 142(c)(t), NIRC in order made been importantly, rr rrrIrrderC., but has, in fact and most
1,, pltce "Hope Luxury," "Premium More" and "Champion" wit'hin r lr,. ,:lassification of locaIIy manufactured cigarettes bearing foreign
specifically, to locally provisions applied tlr,. 11916r law would have its amendatory were not its effectiuily of time ,,, rr rrnfactured cigarettes which at the of the issuance the to Prior ,,, t'lassified as bearing foreign brands. and More," "Premium ,l,rlstioned circular, "Hope Luxury," "r ,lrarnpion" cigarettes were in the category of Iocally manufactured , ,li,rrettes nol bearing foreign brand subject to 459/o ad uy.lorem tax. ilr.rrc€, without RMC 37-93, the enactment of R.A. 7654 would have lr:rtl no new tax rate consequence on private respondent's products. l,iviclently, in order to place "Hope Luxury," "Premium More," and ( hampion" cigarettes within the scope of the amendatory 1aw and ,rbject them to an increased tax rate, the disputed RMC 37-93 had (0 be issued. In so doing, the BIR not simply interpreted the law; vt,rily, it legislated. under its quasi-legislative authority. The due ,,lrservance of the requirements of notice, hearing and publication r;hould not have been then ignored. t, r rr
rrtls and to thereby have thern covered by R.A. 7654.
RMC 37-93 likewise infringed on uniformity of taxation. scc. 28(2), Art. VI of the 1987 constitution mandates taxation to be
niform and equitable. Thus, all taxable articles or kinds of property ,r{, the same class must be taxed at the same rate and the tax must operate with the same force and effect where the subject may be lbund. rr
159
r
'l'Ax I,AWS ANI) ll,lt(itJl,A'l'l(JNS
I,AW OI.' t]ASIC'I'AXA'J'ION IN THI' PHILII'I'INES
RMC 37-93 apparently applies only to "Hope Luxury," "Premium More," and "Champion" cigarettes, and thus suffers from lack of uniformity of taxation. The CTA, in its decision, noted that other cigarettes bearing foreign brands have not been similarly included within the scope of the circular. The hastily promulgated RMC 37-93 has fallen short of a valid and effective administrative issuance.
COMMISSIONER OF INTERNAL BEVENUE v. COURT OF APPEALS, ET AL., G.R. NO. 1t7982, FEB. 6, 1997 FACTS: The present dispute arose from the discrepancy in the taxable base on which the excise tax is to apply on account of two incongruous BIR rulings: (1) BIR Ruling 473-88, dated Oct. 4, 1988, rvhich exclurled the VAT from the tax base in computing the 15% excise tax due, purported.Ly in accordance with Sec. 127 of the Tax Code, as amended by E.C. 273; and, (2) BIR Ruling 017-91, dated Feb" 1l-, 1991, which included back the VAT in computing the tax base for purposes of the 15% ad ualorem tax, pursuant to Sec. 742 of. the T'ax Code and thereby revoking BIR Ruling 473-88. Private respondent Alhambra Industries, Inc. (Alhambra), a dornestic corporation engaged in the manufacture and sale of cigar and cigarette products received on May 7, 1991 a letter dated Apr. 26, 1991 from the Cornmissioner of Internal Revenue assessing a deficiency ad ualorem tax of P488,396.62, inclusive of incrernents c,n rermovals of cigarette products from place of production for the period from Nov. 2, 1990 to Jan. 22,1991,. Alhambra protested the assessment and requested that the same be withdrawn and cancelled. The Llommissioner denied the protest and requested payment of the revised arnount of P520,835.29. Without waiting for action on its reqriest for reconsideration, Alhambra filed a petition for review with the C'I'A orr June 19, 1991, even as petitioner, in the meanwhile, denied its request for reconsideration on June 21, 1991. Private resporrdent then paid under protest the disputed ad ualorern tax of 1520,835.29. For the period from Nov. 2, 1990 to Jan. 21, 1991, private respondent Alhambra paid F3,905,348.85 ad ualorem tax, applying Sec. 127(b), NIRC, as interpreted by BIR Ruling 473-88. Fetitioner then sought to apply BIR Ruling 01?-91 retroactively to Alhambra's removals of cigarettes for said period, alleging bad faith on the part of Aihambra, which is an exception to the rule on non-retroactivity of BIR rulings. The CTA ruled in t'avor of private respondent Alhambra and ordered the Commissioner of Internal Revenue to refund F520,835.29 160
r ,r
r,;rr.rrr,rrt.ing erroneously paid ad uqlorem tax. The Court of Appeals tt rr rrrr,rl t,hc CTA's decision holding that there can be no retroactive
,,1,1,1rr':rl.ion
of BIR Ruling 017-91 because Alhambra did not act in
l,,r,l l:rrt,lt.
Itt,)t,l): The deficiency tax assessment issued by petitioner irt'inn:il, private respondent is without legal basis because of the l,r,,lrrlriLion under Sec. 246 of the Tax Code against the retroactive ,r1,1,111'11[,is11 of the revocation of BIR rulings in the absence of bad l,rrl lr orr the part of private respondent. 'l'lrt. correct computation of the excise tax on cigarettes in the , i, ,t ;rt bar is sufficientiy addressed by BIR Ruling 017-91 dated 1,, l, I l, 1991 which'revoked BIR Ruling 473-88 dated Ott.4, 1988. Wcll entrenched is the rule that rulings, circulars, rules and r ,.1, i lrr bions promulgated by the Commissioner of Internal Revenue ,r,,rrlrl have no retroactive application if to so apply them would be 1,,, lrrrlicial to the taxpayer. Without doubt, private respondent would 1,, lrrt..1udiced by the retroactive appiication of the revocation as it '.,,rrlrl be assessed deficiency excise tax. As to whether private respondent falls under the third exception ,rrr,lr.r Sec.246, i.e., taxpayer who acted in bad faith, there is no , \'r(l(,nce that Alhambra's implementation of the computation rr .rrrrlated by BIR Ruling 473-88 is ill-motivated or attended with a ,l lronest purpose. Neither does the failure of private respondent to ,,,,,,rrrlt petiLioner rmply bad faith on the part of the former. r
t ()MMISSIONER OF INTERNAL REVENUE v. COURT OF ,\l,|,EALS, ET AL., G.R. NO. 115349, APB. 18, 1997 ttACTS: Private respondent Ateneo de Manila University
,\lcneo), a non-stock, non-profit educational institution, through one auxiliary units, the Institute of Philippine Culture (IPC), , ,'n(lucts researches and studies ofsocial organizations and cultural r;rltres. The IPC occasionally accepts sponsorships for its research ,r, tivities from international organizations, private foundations and I'.vcrnment agencies. Private respondent Ateneo was assessed on June 3, 1983 the rrrrrount of P174,043.97 for alleged deficiency contractor's tax, and ,,lr .Iune 27, L983, the amount of P1,141,837 for alleged deficiency ,r(:ome tax for the fiscal year ending 1978. Ateneo denied said tax lr;rbilities in a letter-protest and contested the validity of the ,r;sessments. The Commissioner of Internal Revenue rendered a r
,,1 rt,s
161
r-
l,nw ot' IIASIC .t.AXA.l'l()N IN 1'1il, l,Hlt,l t,t,tNI,)S
1'AX I,NWS AND RIIGULA'I'IONS
decision canceling the deficiency income tax but modiiying t,l assessment for deficiencl, contractor,s tax to FlgB,+Zf,fi unsatisfied, Ateneo requested for reconsideration of the modifi assessment, and at the same time filed a petition for review wi the crA. while the petition was pending therein, the commrssiorr issued a final decision on Aug. B, lggg reducing the defici contractor's tax to P46,b16.41, exciusive of surcharges and. inter The
crA
set aside the commissioner's decision and canceled
thl
assessment. The court of Appeals likewise disagreed with the Commissioner and affirmed the CTA's ruling. Petitioner contends that private respondent Ateneo is an independent contractor subject to the B%o tax levied under sec.221t, NIRC. Petitioner stated that since the term "independ.ent contractor,t
is not specifically defined, any person who renders physical or mental service for a fee is considered an independent contractor liable for the 3o/o contractor's tax, and Ateneo has the burden of proof to show its exemption from the coverage of the law.
HELD: Petitioner commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the well settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to deteimine who are exempted without first determining who are covered by the aforesaid provision. The commissioner should have d.etermined first if private respondent was covered by Sec. 20b, applying the rule of strict interpretation of laws imposing taxes and otirer"burdens on the populace, before asking Ateneo to prove its exemption therefrom. The court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that ,,(a) statute will not be construed as imposing a tax unress it does so'crearry, expressry and unambiguously. x x x (A) tqx cqnnot be imposed wiihout ctear and express words for that purpose. Accordingly, the general rule of requiring udherence to the letter in construing statutis applies with peculiar strictness to tax loros and the provisions of a taxing act are ruot to 6e extended by implication." parenthetically, in ariswering the question of who is subject to tax statutes, it is basic that ,,in case of doubt, such statutes are to be construed most strongly against the Government and in favor of the subjects or citizeis because burdens are not to be imposed nor presumed to be imposed beyond what the statutes expressly and. clearly import.', To fall under its coverage, sec. 20b of the rg77 NIRC requires that the independent contractor be engaged in the business of sllling its services. Hence, to impose the three percent contractor,s tax on 162
it
should be sufficiently its services for after u 1,., ,,, 1,,,."rit of an independent business' And it is only to the be subject t:*t.i,t,, ,:,'spondent has been found cleariy to exemption therefrom i,*,,,,,,,,,,,,'nf S"". 205 that the question of does the ru]'e of shown is coverage such after .*,,,r1,1 ,,rrse. Only i,r'1lr u('l,ron-that tax exemptions are to be strictly construed riE,irr',1 t,he taxpayer-come into play, contrary to petitioner's
''.trt.rrr..,r lrrsti[ute of Philippine Culture, g,,,,,,,,, llrrrt, the private resptndent is indeed selling
;li,rlltoll.
'l'lr.r'c is no evid'ence that private respondent Ateneo's IPC ever I I : r :;1lrvices for a fee to anyone or was eyer engaged in a business =rr purposes of the 11,,,,t lrom and independenily of the academic r
Ir
I
ll
r
v,
r's
it.Y.
l'unds received by Ateneo,s IPC are technical}y not a fee. to an l11r.1' rrril1,, however, be considered as gifts or donations 123' Sec' tO pursuant erlrrr rr I r,lnal institution which are tax exempt, llll{('(rrow, Sec. 101, 1997 NIRC). ,|.1r..
I'III I,I PPINE BANK OF COMMUNICATIONS V' ( (INIMISSIONER OF INTERNAL REVENUE' ET AL'' G'R' r't( ! I12024, JAN. 28, 1999 (PBCom) ItAcTS: Petitioner Philippine Bank of communications and first the trl, rl rt,s quarterly .rrpor"iu income tax returns for due tax the profits and settled 'rr.r,n(l quarters of fgSS, reported rl,, r (,()n of P5,0t6,954 by applying its tax credit memos' llowever, PBCom suffered losses and when it filed its annual sslrrrfile tax return for 1985, it declared a net loss of'fl1'317'228' rlr,.rtby showing no income tax liability. It also reported a net loss ,'t t'14;129,602 ior 1986 and thus declared no tax payable for that earned rental income i,, ,rr. During those 2 years, however, PBCom tr,rr. its leased prop"rii", with the lessees withholding and remitting t,, t lre BIE the corresponding withholding creditable taxes' of On Aug. 7, \g87, PBCom requested the BIR for a tax credit and first the for r1,,016,954 representing the overpayment of taxes ,,,.,:,,,rd'quarters of 1985: On July 25, 1988, PBCom filed a claim for income r,.t'und oicreditable taxes withheld by its lessees from rental ,,11n282,7g5.50andmg4,077.69for1985and1986'respectively' l','rrding investigation, PBCom filed a petition for review on Nov. 18, 1988 with the CTA. PBCom',s The cTA rendered a decision on May 20, 1993 denying 1985 on for ?5,299'749'95 r.r;uest for tax refund or credit totaling 163
r-
'l'r\X LAWS ANll ltllcUl'A'l'lONS
LAW O!'tsASIC TAXATION IN THE PTIII,IPPINES
the ground that it was filed beyond the 2-year prescriptive pe It also denied PBCom's claim for refund for 1986 amounting fl,34,077.99 on the assumption that it was automatically credir by PBCom against its tax assessment in the succeed.ing year. I motion for reconsideration having been denied, pBCom filod petition for review with the Court of Appeals which, affirmed the CTA's decision. PBCom averred that the Court of Appeals erred. in denying plea for tax refund or tax credit on the ground of prescripti despite its reliance on Revenue Memorandum Circular No. T (RMC 7-85), dated Apr. 1, 1g8b, changing the prescriptive p from 2 years to 10 years. Said circular states that overpaid in taxes are not covered by the 2-year prescriptive period under Tax Code and that taxpayers may claim refund or tax credit for excess quarterly income tax from the BIR within 10 years purs to Art. 1144, Civil Code. Petitioner further argued that Government is barred from asserting a position inconsistent wi one previously taken and that BIR circulars or rulings have retroactive effect when the same would result in injustice taxpayers. Contrarily, the Commissioner of Internal Revenue insi on the reckoning of the 2-year prescriptive period from the date filing the final adjusted income tax return.
HELD: After a review of the records and applicab
i
jurisprudence, the supreme court held that the relaxation of reven, regulations by RMC 7-85 is not warranted since it disregards Z-year prescriptive period set by law. Claims for refund or tax credit should be made within the ti fixed by Iaw because the BIR, being an administrative body e to collect taxes, its functions should not be unduly delayed hampered by incidental matters. Sec. 230, NIRC (now, Sec. 229, 1ggf NIRC) which provides the prescriptive period for filing a court proceeding for the oftax erroneously or illegally collected, states that the taxpayer n file a claim for refund or credit with the commissioner of Inter Revenue within 2 years after payment of the tax before any suit the CTA is commenced. The 2-year prescriptive period should computed from the time of filing the adjustment return and payment of the tax for the year. When the Acting Commissioner of Internal Revenue issued R 7-85 changing the prescriptive period of2 years to 10 years on clair of excess quarterly income tax payments, such circular created 164
230 of the 19?7 NIRC' lr rr r r nr'onsistency with the provision of Sec' the-law; rather' it gtnJid interpret simply not 11, ,,, rl,rrrg, tne
contrary to the statute passed by Congress' l(,'v.rttte memorandum circulars are considered administrative interpretations *ril.rtirr(irr the sense of more specific and less general Commissioner the by time to time from ,,1 t,,,, l,rws) which are issued interpretation the that accepted widely ,,1 lrrt,,r.rrul Revenue. It is officers' whose duty is to 1ilr,, 'l u[)on a statute by the executil'e -,,1,,,,,' ii,, is entitled to great respect by the courts' Nevertheless' i, ,tot".o"tusive and will be ignored if judicially =,,, t, , ,, t,,.pretation I*rrrrrl t,o be erroneous' Thus, courts will not countenance instead of remaining e,lrrr r rr rstrative iss.tarrces that override' seek to apply and they law the with, rrrrr',r'rl*Dt and in frui*o"y
l"f: r ,lrr t ,'tl guidelines
irrrl,llttttltlL. Irr l)eople u.
Lim (108 PhiI' 1091)' it was held that rules and
a law r,,t,rrl:rlions issued by administrative officiais to implement of the latter' , ,,',,,',,1 go beyond the terms and provisions
I.'rrrrdamentalistherulethattheStatecannotbeputinestoppel 7 85 issued llr,' mistakes o, urro,. of its officials and agents' RMC Revenue is an administrative , r ,, ' Acting Commissioner of Internal ' with Sec' 230 of the 1977 harmony in not ,,,t,',1,.etatiin which is rlri(l :rnd should be nullified for being contrary !q the.express not be given could interpretation his Hence, t,r,'\'rrion of a statute. .-, ,,'l't. for to do so would in effect amend the statute' as ,\rlrninistrative decisions do not enjoy the level of recognition judicial decisions given to 1,, r i part rrf the legal system of the country circular of a bureau memorandum A Code' ,,,,1,'r-Art. 8 of the Civll not operate to vest a taxpayer with a shield against 1,, ',,1 could rights to speak of respecting a r,r,lr, i:rl action. There are no vested officials and ,i ,,.I-t construction-of the law by the administrative not place the Government in 'rrr lr wrong interpretation could
1,,
t
|
rr
1
o"""'ule ttre same' Moreover' the ,t,rppeI to "orr"a1--o" of Internal Revenue ,,,,,, .,,trou.tivity of rulings by the Commissioner was ,, rr,,t, applicabll in thisiase because the nullity of RMC 7-85 of ,1,,lrrred by respondent courts and not by the Commissioner of a claim for lrrl,'r'rr&l Revenue' A .t^l* for refund is in the nature juris against the , ,,,"rnption and should be construed strlclissimi
,.
I :r ",
lrir|€L
1997 NIRC) provides Scc. 69 of the 1977 NiRC (now, Sec' 76 of the
tf," 1"t"i quarterly payments over the actual tlr;r( uny excess "i in the adjustment or finai corporate income r, {rrr)e tax computed corporation' or r , ,: return , snitt either (a) be refundeti to the 165
LAW OT BASIC TAXATION IN THE PHILIPPINIIS
TAX LAWS AND RAGULATIONS
(b) may be credited against the estimated quarterly income liabilities for the quarters ofthe succeeding taxable year.
of relief-the flnlrl rlouble taxation. There are two methods the exemption method,
The corporation must signify in its annual corporate adjus
return (by marking the option box provided in the BIR form) intention, whether to request for a refund or to claim an automl tax credit for the succeeding taxable year. To ease the administr of tax collection, these remedies are in the alternative, and the ch of one precludes the other. ,
COMMISSIONER OF INTERNAL REVENUE v. S.C. JO AND SON, INC., ET AL., G.R. NO. L27105, JUNE, 25, 1999,i
HELD: The purpose of these international agreements reconcile the national fiscal legislations ofthe contracting parti
order to help the taxpayer avoid simultaneous taxation in different jurisdictions. More precisely, the tax conventions drafted with a view towards the elimination of international iuri d,ouble taxation, which is defined as the imposition of com taxes in two or more states on the same taxpayer in respect of same subject matter and for identical periods. The apparent rati for doing away with double taxation is to encourage the free goods and services and the movement of capital, technology persons between countries, conditions deemed vital in creating and dynamic economies. Foreign investments will only thrive fairly predictable and reasonable international investment cli and the protection against double taxation is crucial in creating s a climate.
Double taxation usually takes place when a person is a of a contracting state and derives income from, or owns capital the other contracting state and both states impose taxes on income or capital. In order to eliminate double taxation, a tax trei resorts to several methods. First, it sets out the respective righ bax of the state of source or situs and of the state of residence regard to certain classes of income or capital. In some cases, exclusive right to tax is conferred on one of the contracting stat however, for other items of income or capital, both states are giVi the right to tax, although the amount of tax that may be imposed.i the state of source is limited. The second method for the elimination of double taxation ap whenever the state of source is given a ful} or lirnited right to together with the state of resi.dence. In this case, the treaties m it incumbent upon the state of residence to allow relief in order
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forlrrlrl,ion method and the credit method. In p lrrr,:ome or capital which is taxable in the state of source or situs A*errrrpted in the state of residence, although in some instances it ty 6, i,aken into account in determining the rate of tax applicable in t,ho t,+rxpayer's remaining income or capital' On the other hand, in is taxed which rrriltlit method, although the income or capital tax the residence, rl,rrl,cl of source is still taxable in the state of lrl irr the former is credited against the tax levied in the latter. rs hllsic difference between the two methods is that in the Slpnrtlt,ion method, the focus is on the income or capital itself' lEprnrts the credit method focuses upon the tax. In negotiating tax.treaties, the underiying rationale forreducing part of the tax in lhp trrx ,ut" ir that the Philippines will give up a particular investment given for this up ihe, *,xpectation that the tax correctly petitioner the Thus, it rrol"taxed by the other country. circumstanies" paid similar under Oplrr,,d that the phrase "royalties
favored nation clause of the US-RP Tax Treaty Ilpr,r,usarily contemplated "circumstances that are tax-reIated."
Il tlr,, most
'l,he ultimate reason for avoiding double taxation is to encourage
frlrrign investors to invest in the Philippines-a crucial economic g,,u I ibr developing countries. The goal of double taxation conventions =Wilrrld be thwarted if such treaties did not provide for effective Iutsilsures to minimize, if not completely eliminate, the tax burden lar,l rrpon the income or capital of the investor. Thus, if the rates of Philippines, i n x , rL lowered by the state of source, in this case, by the part of the state the on lltt,rc should be a concomitant commitment be in the this whether relief, of tax 1l' rgsidence to grant some form could which tax the Otherwise, fsnrr of a tax credit or exemption. be simply will Government Iravo been collected by the Philippine since treaty tax the of object the r,llloc[ed by another state, defeating l,hr tax burden imposed upon the investor would remain unrelieved. !l' l,he state of residence does not grant some form of tax relief to the Itlvostor, no benefit would redound to the Philippines, i.e" increased Irrvcstment resulting from a favorable tax regime, should it impose a l0wer tax rate on the royalty earnings of the investor, and it would lu, better to impose the regular rate rather than lose much-needed t(!venues to another countrY. At the same time, the intention behind the adoption of the treaties in ltrovision on "relief from double taxation" in the two tax the purpose behind the of light in consid.ered be ilqcstion should clause. rrrost favored nation L67
F LAW O!'BASIC TAXATION IN'IIHE PHII,IPPINI'S
The purpose of a rnost favored nation clause is to grant to tht contracting party treatment not less favorable than that which hal been or may be granted to the "most favored" among other countri The most favored nation clause is intended to establish the princi of equality of international treatment by providing that the citizont or subjects of the contracting nations may enjoy the privilegor accorded by either party to bhose of the most favored nation. Thc essence of the principle is to aliow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which tho country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is tho same as that in the tax treaty under which the taxpayer is liabk:, Both Article 18 of the Rp-us rax Treaty and Article ri(zxu) of tho RP-west Germany Tax Treaty speak of tax on royalties for the uss of trademark, patent and technology. The entitlement of the 10% rate by u's. firms despite the absence of a matching credit (2oo/o fot royalties) would derogate from the design behind the most favored nation clause to grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of the most favor"d nation treatment precisely to underscore the need for equality of treatment.
.I'AX I,AWS AND R!]GULATIONS
Assume for example that in 1986, in response to a legal query 1,,,'',.,1 lr.y a pawnshop owner, the BIR ruled that pawnshops are not l, rr,lrrr11 investors subject to the 5o/o tax under Sec. 116 of the Tax r',,r1r.. l'ursuant to this ruling, Squaredeal Pawnshop, Inc. did not I,i, \' ir ny lending investors tax on its business. However, in 1988 the ll I lt rt.versed this ruling and declared that pawnshop operators are (rrr:rlrle . May the BIR, therefore, in consonance with this latter
'I
rrlrrrg, assess Squaredeal Pawnshop, Inc. for back taxes ,,,r r',.sponding to the period prior to the 1988 ruling? Give your r r
(':lliol1s,
Assume, however, that in the problem above, no ruling on r lr,. t axability or non-taxability of pawnshop owners was ever issued, rl, 1,r)u think the BIR could retroactively apply the 1988 ruling and ,;r::(,ss pawnshop owners accordingly? Reasons'
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EXERCISES
1. During the period of the deficiency but prior to assessment, law was passed providing that interest would be collectible on the amount of income tax not paid. Accordingly, the commissioner of Internal Revenue included such amount in the assessment made. The taxpayer refused, contending that to require him to pay such interest would be to violate the prohibition agains t ex post fictolaws. Decide the case with reasons. (1g72 Bar) 2. where a doubt or ambiguity arises in connection with the imposition of a tax under a particular taxing state, what rule of construction is applied? Discuss. 3. It is oftentimes said that our tax laws, like the law on income tax under our National Internal Revenue code, are neither political nor penal but they are actually civil, in nature. Discuss the importance of this principle especially as it relates to the deductibility of losses during wartime as the imposition of war profits taxes on increases in net worth during the war. a
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