chap1syllabus

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PART I- TAXATION IN GENERAL

CHAPTER IGENERAL PRINCIPLES OF TAXATION

1. TAXATION

1. Definition of Taxation

i. 71 Am Jur. 2nd342Taxationis the act of levying the tax, i.e., the process or means by which the sovereign, through its law-making body,

raises income to defray the necessary expenses of the government. It is merely a way of apportioning the cost if the

government among those who in some measures are privileged to enjoy its benefits and, therefore, must bear its

burdens.

2. Aspects of Taxation1. Levy or imposition

- Legislative power, includes the determination of the persons, property or excises to be taxed, the sums orsums to be raised, the due date thereof and manner of levying or collecting taxes.(aban p. 12)

- The term levy or imposition refers to the enactment of tax laws or statutes (dimaampao p. 14)- tax legislation (beda notes p. 02)

2. Assessment & Collection- consists of the manner of enforcement of the obligation on the part of those who are taxed. (aban p. 12)- the act of assessing and collecting of taxes is administrative in character, and therefore ca be delegated.

Nonetheless, the legislative body has laid down certain rules governing the assessement and collection of

taxes in order to prevent its abuse.

First,the law will designate which agency will collect the taxes. Usually, the BIR or Sec. of Finace wield this

power.

Second,the circulars or regulations issued by the Sec. of Finance or the Comm. Of the Internal Revenue

must be in accordance with the tax measures imposed by Congress.

(dimaampao p. 21)

- Tax administration (beda notes p. 02)

3. Payment this signifies an act of compliance by the taxpayer (dimaampao p. 21)

i. CIR vs BOTELHO SHIPPING CORPORATION and GENERAL SHIPPING CO., INC. G.R. Nos. L-

21633-3, June 29, 1967

FACTS: Reparations Commission of the Philippines sold to Botelho the vessel "M/S Maria Rosello" for the amount of P6,798,888.88.

The former likewise sold to General Shipping the vessel "M/S General Lim" at the price of P6,951,666.66. Upon arrival at the port of

Manila, the Bureau of Customs placed the same under custody and refused to give due course [to applications for registration],

unless the aforementioned sums of P483,433 and P494,824 be paid as compensating tax. The buyers subsequently filed with the

CTA their respective petitions for review. Pending the case, Republic Act No. 3079 amended Republic Act No. 1789 the Original

Reparations Act, under which the aforementioned contracts with the Buyers had been executed by exempting buyers of

reparations goods acquired from the Commission, from liability for the compensating tax.

Invoking [section 20 of the RA 3079], the Buyers applied, for the renovation of their utilizations contracts with the Commission,

which granted the application, and, then, filed with the Tax Court, their supplemental petitions for review. The CTA ruled in favor of

the buyers.

[On appeal, the CIR and COC maintain that such proviso should not be applied retroactively], upon the ground that a tax exemption

must be clear and explicit; that there is no express provision for the retroactivity of the exemption, established by Republic Act No.

3079, from the compensating tax; that the favorable provisions, which are referred to in section 20 thereof, cannot include the


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exemption from compensating tax; and, that Congress could not have intended any retroactive exemption, considering that the

result thereof would be prejudicial to the Government.

ISSUE: Whether or not the tax exemption can be applied retroactively

HELD: YES. The inherent weakness of the last ground becomes manifest when we consider that, if true, there could be no tax

exemption of any kind whatsoever, even if Congress should wish to create one, because every such exemption implies a waiver of

the right to collect what otherwise would be due to the Government, and, in this sense, is prejudicial thereto. It may not be amiss to

add that no tax exemption like any other legal exemption or exception is given without any reason therefor. In much the same

way as other statutory commands, its avowed purpose is some public benefit or interest, which the law-making body considers

sufficient to offset the monetary loss entitled in the grant of the exemption. Indeed, section 20 of Republic Act No. 3079 exacts a

valuable consideration for the retroactivity of its favorable provisions, namely, the voluntary assumption, by the end-user who

bought reparations goods prior to June 17, 1961 of "all the new obligations provided for in" said Act.

Furthermore, Section 14 of the Law on Reparations, as amended, exempts from the compensating tax, not particular

persons, but persons belonging to a particular class. Indeed, appellants do not assail the constitutionality of said section 14,

insofar as it grants exemptions to end-users who, after the approval of Republic Act No. 3079, on June 17, 1961, purchased

reparations goods procured by the Commission. From the viewpoint of Constitutional Law, especially the equal protection

clause, there is no difference between the grant of exemption to said end-users, and the extension of the grant to thosewhose contracts of purchase and sale mere made before said date, under Republic Act No. 1789.

ii. TAN vs. DEL ROSARIO Jr. 237 SCRA 324

FACTS:

The case involvestwo consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of

Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain

provisions of the National Internal Revenue Code and, in G.R. No. 109446, the validity of Section 6, Revenue Regulations

No. 2-93, promulgated by public respondents pursuant to said law.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at least,

deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and Professionals

Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of whether or not public respondents have

exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.

ISSUE: WHETHER OR NOT the provision is unconstitutional

HELD:

G.R. No. 109289

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to unite

the members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid surprises

or even fraud upon the legislature, and (c) to fairly apprise the people, through such publications of its proceedings as are

usually made, of the subjects of legislation.1

The above objectives of the fundamental law appear to us to have been

sufficiently met. Anything else would be to require a virtual compendium of the law which could not have been the

intendment of the constitutional mandate.

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform

and equitable" in that the law would now attempt to tax single proprietorships and professionals differently from the

manner it imposes the tax on corporations and partnerships. The contention clearly forgets, however, that such a system of

income taxation has long been the prevailing rule even prior to Republic Act No. 7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation,

similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371).

Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not


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arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to

both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class

(Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the

income tax system towards the schedular approach2

in the income taxation of individual taxpayers and to maintain, by and

large, the present global treatment3

on taxable corporations. We certainly do not view this classification to be arbitrary and

inappropriate.

G.R. No. 109446

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no

matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for

purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated as,

corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of

income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so

correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover

corporations and partnerships which are independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as

independent taxable entities for income tax purposes. A general professionalpartnership is such an example.4

Here, the

partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration

and data]), are liable for the payment of income tax in their individual capacity computed on their respective and

distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no

choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be

no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of

such income to, respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified

by Republic Act No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on

their non-compensation income. There is no evident intention of the law, either before or after the amendatory legislation,

to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their

respective professions individually and of those who do it through a general professional partnership.

3. Nature of Internal Revenue Laws

i. Hilado v. CIR, 100 Phil. 288

FACTS: Hilado filed his income tax return wherein he claimed the amount of P12,387.65 as a deductible item from his gross income

pursuant to the Collector of Internal Revenues General Circular No. V-123, issued pursuant to certain rules laid down by the

Secretary of Finance.

Subsequently, the new Secretary of Finance, through the CIR, issued General Circular No. V-139 which revoked General Circular No.

V-123 and laid down the rule that property losses which occurred during the World War II are deductible in the year of actual

loss/destruction of said property. As a consequence, the P12,387.65 was disallowed as a deduction from petitioners gross income

for 1951 and the CIR demanded from him the payment of P3,546 as deficiency income tax for the year.

ISSUE: Whether the Secretary of Finance acted with valid authority in revoking General Circular No. V-123 and approving in lieu

thereof, General Circular No. V-139.

HELD:internal revenue laws are not political in nature and as such werecontinued in force during the period of enemy

occupation and in effect were actuallyenforced by the occupation government. As a matter of fact, income tax returns were filed

during that period and income tax payment were effected and considered valid and legal.

Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy.

excepting that of a political nature, Law once established continues until changed by some competent legislative power.

It is not changed merely by change of sovereignty.


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4. Scope of Taxation- It is comprehensive, unlimited, supreme and plenary, but subject to constitutional and inherent limitations.

(http://tax71.blogspot.com/2009/06/nature-and-scope-of-power-of-taxation.html)

a. Sec. 28, Art. VI, 1987 Constitution

SECTION 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

(2) The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations andrestrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or impostswithin the framework of the national development program of the Government.

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and alllands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposesshall be exempt from taxation.

(4) No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of theCongress.

b. 71 Am Jur 2 nd 394-395 & 397-398:c.

In the absence of constitutional restrictions, and subject to the will of the legislative bodies and discretion ofthe authorities which exercise it, the power of taxation is regarded as unlimited, plenary and supreme, the principalcheck upon its abuse resting in the responsibility of the members of the legislature to their constituents. Although thepower may

be exercised even to the point of destroying the commercial or use value of the thing taxed, it hasbeen said, on the other hand, that even in the absence of constitutional restrictions, such exercise must rest upon

justice.

Personal property belonging to a foreign sovereign and temporarily located in a particular country isnot subject to state taxation in that country.

a sovereign state has inherent power to determine the subjects of taxation for general orparticular public purposes, and may take appropriate changes in the selections and classifications of the propertiesmade subject to or exempted from taxation.

d. Sison vs. Ancheta 130 SCRA 654

FACTS:The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1on the validity of Section I ofBatas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section 21 of

the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation

income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other

monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual

partner in the net profits of taxable partnership, (f) adjusted gross income. Petitioner3as taxpayer alleges that by virtue thereof, "he

would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his

profession vis-a-visthose which are imposed upon fixed income or salaried individual taxpayers. He characterizes the above section

as arbitrary amounting to class legislation, oppressive and capricious in character5For petitioner, therefore, there is a transgression

of both the equal protection and due process clauses of the Constitution as well as of the rule requiring uniformity in taxation.

ISSUE:whether or not Batas Pambansa Blg. 35 is unconstitutional

HELD:PETITION IS DISMISSED.

The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of of

government." It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The

Constitution sets forth such limits. Adversely affecting as it does properly rights, both the due process and equal protection clauses

inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise, there would

-be truth to the 1803 dictum of Chief Justice Marshallthat
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"the power to tax involves the power to destroy."

In a separate opinion in Graves v. New York, Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as

"a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes." This is merely to

emphasize that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web

of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes pen:

'The power to tax is not the power to destroy while this Court sits. So it is in the Philippines

It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the

Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse

of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not

conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is

beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it

is subject to attack on due process grounds.

e. Reyes vs. Alamanzor, 196 SCRA 322

FACTS:Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in Tondo and Sta. Cruz Districts,

City of Manila, which are leased and entirely occupied as dwelling sites by tenants. Said tenants were paying monthly rentals not

exceeding three hundred pesos (P300.00) in July, 1971.

On July 14, 1971, the National Legislature enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in

monthly rentals of dwelling units or of lands on which another's dwelling is located, where such rentals do not exceed th ree hundred

pesos (P300.00) a month but allowing an increase in rent by not more than 10% thereafter.

On October 12, 1972, Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the prohibition to increase monthly

rentals below P300.00 and by indefinitely suspending the aforementioned provision of the Civil Code, excepting leases with a

definite period. Consequently, the Reyeses were precluded from raising the rentals and from ejecting the tenants thereof.

The City Assessor of Manila assessed the value of the Reyeses property on the schedule of market values duly reviewed by theSecretary of Finance. The revision entailed an increase to the tax rates and the petitioners averred that the reassessment imposed

upon them greatly exceeded the annual income derived from their properties.

ISSUE:WON income approach is the method to be used in the tax assessment and not the comparable sales approach.

HELD:The income approach and not the comparable sales approach must be used.

By no strength of the imagination can the market value of properties covered by P.D. No. 20 be equated with the market value of

properties not so covered. The former has naturally a much lesser market value in view of the rental restrictions.

In the case at bar, not even the factors determinant of the assessed value of subject properties under the "comparable sales

approach" were presented by the public respondents, namely: (1) that the sale must represent a bonafidearm's length transactionbetween a willing seller and a willing buyer and (2) the property must be comparable property. Nothing can justify or support their

view as it is of judicial notice that for properties covered by P.D. 20 especially during the time in question, there were hardly any

willing buyers. As a general rule, there were no takers so that there can be no reasonable basis for the conclusion that these

properties were comparable with other residential properties not burdened by P.D. 20.

f. Sarasola vs. Trinidad, 40 Phil. 259, GR No. 14595, 11 Oct. 1919

FACTS: The complaint in this case was filed in the Court of First Instance of Manila for the purpose of having an injunction issue to

restrain the defendant, the Collector of Internal Revenue, from the alleged illegal collection of taxes in the amount of P11,739.29.The defendant interposed a demurrer to the complaint, based on two grounds, namely: (1) that the court had no jurisdiction of the

subject-matter of the action because of the provisions of section 1578 of the Administrative Code of 1917; and (2) that the facts

stated in the complaint did not entitle the plaintiff to the relief demanded.

ISSUE: whether or not legal the provision prohibiting the courts from granting an injunction to retrain the collection of internal

revenue taxes constitutional


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HELD:

The broad principle is that every taxpayer has a right to a remedy for any actual wrong he may have suffered in the collection of

taxes. Usually a party will find a plain and sufficient remedy for the injuries complained of, or threatened, in the courts of law; in

such instances, equity will not take jurisdiction. "Presumptively," Judge Cooley says, "the remedy at law is adequate." (Cooley on

Taxation, 3d Ed., Vol. 2, pp. 1377, 1412, 1415.) Where, as in the Philippines, the taxpayer is permitted to pay the amount demanded

of him under protest and then maintain an action at law to recover back the whole amount paid or so much of it as was illegally

exacted, this is ordinarily regarded as an adequate remedy.

An exceptional circumstance which serves to take cases out of the general rule comes under the head of irreparable injury.

It is well settled both on principle and authority that interest is not to be awarded against a sovereign government, as the United

States or a State, unless its consent has been manifested by an Act of its Legislature or by a lawful contract of its executive officers. If

there be doubt upon the subject, that doubt must be resolved in favor of the State.

As this is the main rule, the converse proposition must be equally true, that taxes only draw interest as do sums of money when

expressly authorized. A corollary to the principle is also self-evident, that interest cannot be recovered on an abatement unless the

statute provides for it. (1 Cooley on Taxation, 3d Ed., p. 20; 2 Cooley on Taxation, 3d Ed., p. 1392; City of Lowell vs.County

Commissioners of Middlesex [1862], 3 Allen [Mass.], 550.) The only contrary dictum is to the effect that where an illegal tax has beencollected, the citizen who has paid and is obliged to bring suit against the collector is entitled to interest from the time of the illegal

exaction. (Erskine vs.Van Arsdale [1872], 15 Wall., 75; National Home vs.Parrish [1913], 229 U.S., 494; Matter of O'Berry [1904], 179

N.Y., 285.) The distinction undoubtedly arises through the fiction that the suit is against the collector and not against the State,

although the judgment is not to be paid by the collector but directly from the treasury.chanroblesvirtualawlibrary chanrobles virtual

law library

It has been urged that since interest is in the nature of damages, it is proper for allowance. While this may be true in the general run

of cases, it is not necessary true when the sovereign power is concerned. The state is not amenable to judgments for damages or

costs without its consent.

The reason for what superficially seems to be a harsh ruling goes back to the fundamental conception of the nature of taxation. It is

but a truism to restate that taxation is an attribute of sovereignty. It is the strongest of all the powers of government. It involves, asChief Justice Marshall in his historical statement said, the power to destroy. (McCulloch vs.Maryland [1819], 4 Wheat., 316; Loan

Association vs.Topeka [1875], 20 Wall., 655.) "The right of taxation where it exists," the court said in Austin vs.Aldermen ([1868], 7

Wall., 694), "is necessarily unlimited in its nature. It carriers with it inherently the power to embarrass and destroy."

it would seem that the legislature has considered that a law providing for the payment of a tax with a right to bring a suit before a

tribunal to recover back the same without interest is a full and adequate remedy for the aggrieved taxpayer. The disallowance of

interest in such case, like the other steps prescribed as conditional to recovery, has been made one of the conditions which the

lawmakers have seen fit to attach to the remedy provided. As the Legislature in the exercise of its wide discretionary power, has

deemed the remedy provided in section 1579 of the Administrative Code to be an adequate mode of testing the validity of an

internal revenue tax and has willed that such a remedy shall be exclusive, the courts not only owe it to a coordinate branch of the

government to respect the opinion thus announced, but have no right to interfere with the enforcement of such a law.

g. CIR vs. Tokyo Shipping, G.R. No. L-68252 May 26, 1995

Facts: Tokyo Shipping a foreign corporation represented in the Philippines by Soriamont Steamship Agencies and owns and operates

M/V Gardenia. NASUTRA2

chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. Soriamont

Agency,4paid the required income and common carrier's taxes P59,523.75 and P47,619.00, respectively (Total P107,142.75). Uponarriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. NASUTRA and Soriamont mutually agreed to have

the vessel sail for Japan without any cargo. Claiming the pre-payment of income and common carrier's taxes as erroneous since no

receipt was realized from the charter agreement, Tokyo instituted a claim for tax credit or refund of the sum P107,142.75 from CIR.

Petitioner failed to act promptly on the claim , hence Tokyo filed a petition for review6

before Court of Tax Appeals. CTA decided for

Tokyo and denied MR of CIR.

Issue: WON Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit whether it was able to prove that it derived no receipts

from its charter agreement, and hence is entitled to a refund of the taxes it pre-paid to the government.


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Ruling: Yes. Pursuant to Section 24 (b) (2) of the National Internal Revenue Code which at that time, a resident foreign corporation

engaged in the transport of cargo is liable for taxes depending on the amount of income it derives from sources within the

Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to have earned income sourced from the

Philippines.

Indeed, a claim for refund is in the nature of a claim for exemption8

and should be construed in strictissimi juris against the taxpayer.

And Tokyo has the burden of proof to establish the factual basis of its claim for tax refund.

But sufficient evidence has already been adduced by Tokyo proving that it derived no receipt from its charter agreement with

NASUTRA - M/V "Gardenia" arrived in Iloilo on January 10, 1981 but found no raw sugar to load and returned to Japan without any

cargo laden on board.

5. Underlying Theory And basis

a. Lifeblood Theory- In Commissioner v. Algue, the Supreme Court said that taxes are the lifeblood of the government and

should be collected without necessary hindrance. They are what we pay for a civilized society. Without taxes, the government

would be paralyzed for lack of motive power to activate and operate it. The government, for its part, is expected to respond in

the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material

values. (http://lexestudyante.blogspot.com/2012/06/general-principles-of-taxation.html)

b. Necessity Theory- Taxes proceeds upon the theory that the existence of government is a necessity; that it

cannot continue without means to pay its expenses; and that for those means it has the right to compel all citizens and

property within its limits to contribute. (Aban p. 07)

- Taxation as stated in the case of Phil. Guaranty Co., Inc. v. Commissioner [13 SCRA 775], is a power predicated uponnecessity. It is a necessary burden to preserve the States sovereignty and a means to give the citizenry an army to resistaggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment

of the citizenry, and those which come within the States territory and facilities and protection which a government is supposed

to provide. (Dimaampao p. 11)

c. Symbiotic Relationship- The term culled from the Supreme Court ruling in CIR v. Algue, Inc. [158 SCRA 9], which states

that :

Taxes are what we pay for civilized society. Without taxes, the government would be

paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural

reluctance to surrender part of ones hard-earned income to the taxing authorities, every person who

is able must contribute his share in the burden of running the government. The government for itspart, is expected to respond in the form of tangible and intangible benefits intended to improve the

lives of the people and enhance their material and moral values.(Dimaampao p.12)

d. Benefits-Protection Theory

- According to this theory, the state demands and receives taxes from the subjects of taxationwithin its jurisdiction so that it may be enabled to carry its mandate into effect and perform the functions of government, and

the citizen pays from his property the portion demanded in order that he may, b means thereof be secured in the enjoyment of

the organized society. However, the foundation of the obligation to pay taxes is not the privileges enjoyed or the protection

given to a citizen by the government, although the payment of taxes gives a right to protection; both are enjoyed as well by

those members of a state who do not pay taxes because they are not able to do so.

Moreover, as pointed out in the Algue, Inc. case, supra, in exchange for the protection that

the State gives to its citizens, taxes must be correspondingly paid to it. (Aban, p.07)

- Bases the power of the Sate to demand and receive taxes on the reciprocal duties of supportand protection. The citizen supports the State by paying the portion from is property that is demanded in order that he may, by

means thereof, be secured in the enjoyment of the benefits of an organized society. Thus, the taxpayer canot question the
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validity of the tax law on the ground that payment of such tax will render him impoverished, or lessen his financial or social

standing, because the obligation to pay taxes is involuntary and compulsory, in exchange for the protection and benefits one

receives from the government. (Dimaampao p. 11-12)

i. 71 Am Jur 2 nd 346-347

The existence of government is a necessity; it cannot continue without means to pay its expenses; and for those meansit has the right to compel all citizens and property within its limits to contribute.

The state demands and receives taxes so that it may be enabled to carry its mandates into effect and perform the functions of

government. The citizen pays from his property the portion demanded, in order that he may, by means thereof, be secured in

the enjoyment of the benefits of organized society.

The general levy of taxes is understood to exact contributions in return for the general benefits of government, and it

promises nothing to the person taxed beyond what may be anticipated from an administration of the laws for individual

protection and the general public good.

Although the duty to pay taxes by the individual is founded in his participation in the benefits arising from the expenditure, it

does not mean that a mans property cannot be taxed unless some benefit to him personally can be pointed out.

ii. CIR v. Algue, inc. L- 28896 Feb. 17, 1988

FACTS: On January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied

activities, received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the

years 1958 and 1959.On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp

received on the same day in the office of the petitioner.

ISSUE: whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private

respondent Algue as legitimate business expenses in its income tax returns.

HELD: Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand; such

collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is

therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of

taxation, which is the promotion of the common good, may be achieved.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive

power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing

authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is

expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their

moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an

arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be

exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the

courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the

taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in

accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was permitted under the

Internal Revenue Code and should therefore not have been disallowed by the petitioner.

6. Principles of Sound Tax System

a. Fiscal Adequacy- That the sources of revenues must be adequate to meet government expenditures, [Chavez v.

Ongpin, 186 SCRA 331], and other public needs. This is in consonance with the doctrine that taxes are the lifeblood of the

Government. (Dimaampao p. 27) (Aban p. 12)

-b. Administrative Feasibility

- Tax laws must be capable of effective and efficient enforcement. They must not obstruct business growthand economic development. (Aban p. 13) (Dimaampao p. 27)


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c. Theoretical JusticeThe tax burden should be in proportion to the taxpayers ability to pay (ability-to-pay principle). This suggests

taxation must be progressive conformably with the constitutional mandate that Congress shall evolve a progressive system of

taxation. (Sec. 28[1], Art. VI, 1987 Constitution)(Aban p. 13)

- The rule of taxation must be uniform and equitable. (Sec. 28[1], Art. VI, 1987 Constitution). Taxation issaid to be equitable when its burden falls on thse better able to pay; taxation is progressive when its rate goes up depending on the

resources of the person affected.(Dimaampao p. 27)

i. Chavez vs. Ongpin, G.R. No. 76778 June 6, 1990

FACTS: The petitioner, Francisco I. Chavez, is a taxpayer and an owner of three parcels of land. He alleges the following: that

Executive Order No. 73 accelerated the application of the general revision of assessments to January 1, 1987 thereby mandating an

excessive increase in real property taxes by 100% to 400% on improvements, and up to 100% on land;

The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the national association of owners-lessors, joins

Chavez in his petition to declare unconstitutional Executive Order No. 73.

ISSUE:whether or not Executive Order No. 73 is unconstitutional

HELD: To continue collecting real property taxes based on valuations arrived at several years ago, in disregard of the increases in the

value of real properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of

the characteristics of a sound tax system, requires that sources of revenues must be adequate to meet government expenditures

and their variations.

II. TAXES

1. Definition

a. 71 Am Jur 2nd343-346Taxationis merely a way of apportioning the cost of government among those who in some measure are privileged to enjoy its

benefits and must bear its burdens.

b. Republic vs. PHILIPPINE RABBIT BUS LINES, INC., G.R. No. L-26862 March 30, 1970FACTS: The complaint of plaintiff-appellant Republic of the Philippines was filed on January 17, 1963 alleging that defendant-

appellee, as the registered owner of two hundred thirty eight (238) motor vehicles, paid to the Motor Vehicles Office in Baguio the

amount of P78,636.17, corresponding to the second installment of registration fees for 1959, not in cash but in the form of

negotiable certificate of indebtedness, the defendant being merely an assignee and not the backpay holder itself. The complaint

sought the payment of such amount with surcharges plus the legal rate of interest from the filing thereof and a declaration of the

nullity of the use of such negotiable certificate of indebtedness to satisfy its obligation. The answer by defendant-appellee, filed on

February 18, 1963, alleged that what it did was in accordance with law, both the Treasurer of the Philippines and the General

Auditing Office having signified their conformity to such a mode of payment. It sought the dismissal of the complaint.

ISSUE: Whether or not the acceptance of the negotiable certificates of indebtedness tendered by defendant bus firms to and

accepted by the Motor Vehicles Office of Baguio City and the corresponding issuance of official receipts therefore acknowledging

such payment by said office is valid and binding on plaintiff Republic.

HELD:A tax refers to a financial obligation imposed by a state on persons, whether natural or juridical, within its jurisdiction, for

property owned, income earned, business or profession engaged in, or any such activity analogous in character for raising the

necessary revenues to take care of the responsibilities of government. An often-quoted definition is that of Cooley: "Taxes are the

enforced proportional contributions from persons and property levied by the state by virtue of its sovereignty for the support of

government and for all public needs.

2. Essential characteristics of Taxes

- forced charge;


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- pecuniary burden payable in money;- levied by the legislature;- assessed with some reasonable rule of apportionment; (see theoretical justice)- imposed by the State within its jurisdiction;- levied for a public purpose.

(beda notes)

a. COMMISSIONER OF INTERNAL REVENUE, vs. CEBU PORTLAND CEMENT COMPANY andCOURT OF TAX APPEALS, G.R. No. L-29059 December 15, 1987

FACTS: By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on appeal by the Supreme Court

on February 27, 1965, the Commissioner of Internal Revenue was ordered to refund to the Cebu Portland Cement Company the

amount of P 359,408.98, representing overpayments of ad valorem taxes on cement produced and sold by it after October 1957.

On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner and the private respondent, the

latter moved for a writ of execution to enforce the said judgment.

The motion was opposed by the petitioner on the ground that the private respondent had an outstanding sales tax liability to which

the judgment debt had already been credited. In fact, it was stressed, there was still a balance owing on the sales taxes in the

amount of P 4,789,279.85 plus 28% surcharge.

Private respondent argues that it cannot be held liable for the sales tax liability for cement is a mineral product and not a

manufactured product.

ISSUE:Whether or not the sales tax is properly imposed upon the private respondent

HELD:The sales tax was properly imposed upon the private respondent for the reason that cement has always been considered a

manufactured product and not a mineral product.

The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of the urgency of the need

to collect taxes as "the lifeblood of the government." If the payment of taxes could be postponed by simply questioning their

validity, the machinery of the state would grind to a halt and all government functions would be paralyzed. That is the reason why,

save for the exception already noted, the Tax Code provides:

Sec. 291. Injunction not available to restrain collection of tax.No court shall have authority to grant an injunction to restrain the

collection of any national internal revenue tax, fee or charge imposed by this Code.

It goes without saying that this injunction is available not only when the assessment is already being questioned in a court of justice

but more so if, as in the instant case, the challenge to the assessment is still-and only-on the administrative level. There is all the

more reason to apply the rule here because it appears that even after crediting of the refund against the tax deficiency, a balance of

more than P 4 million is still due from the private respondent.

To require the petitioner to actually refund to the private respondent the amount of the judgment debt, which he will later have theright to distrain for payment of its sales tax liability, is in our view an idle ritual. We hold that the respondent Court of Tax Appeals

erred in ordering such a charade.

b. MUNICIPALITY OF MAKATI, vs. THE HONORABLE COURT OF APPEALS, G.R. Nos. 89898-99

October 1, 1990

FACTS: The case involves expropriation proceedings initiated by petitioner against private respondent Admiral Finance Creditors

Consortium, Inc., Home Building System & Realty Corporation and one Arceli P. Jo, involving a parcel of land and improvements

thereon located at Mayapis St., San Antonio Village, Makati and registered in the name of Arceli P. Jo under TCT No. S-5499.

A bank account (Account No. S/A 265-537154-3) had been opened with the PNB Buendia Branch under petitioner's name containing

the sum of P417,510.00, made pursuant to the provisions of Pres. Decree No. 42. RTC issued the corresponding amount to be paid

by the petitioner and issued a writ of execution. Consolidated petitions filed before CA were dismissed for lack of merit, sustained

the jurisdiction of respondent RTC judge over the funds contained in petitioner's PNB Account No. 265-537154-3, and affirmed his

authority to levy on such funds. Hence petition to Supreme Court were petitioner, Admitting that its PNB Account No. S/A 265-

537154-3 was specifically opened for expropriation proceedings it had initiated over the subject property, petitioner poses no

objection to the garnishment or the levy under execution of the funds deposited therein amounting to P99,743.94. However, it is

petitioner's main contention that inasmuch as the assailed orders of respondent RTC judge involved the net amount of


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P4,965,506.45, the funds garnished by respondent sheriff in excess of P99,743.94, which are public funds earmarked for the

municipal government's other statutory obligations, are exempted from execution without the proper appropriation required under

the law.

ISSUE: WHETHER OR NOT RTC can issue garnishment proceedings on the accounts of petitioner.

HELD: The funds deposited in the second PNB Account No. S/A 263-530850-7 are public funds of the municipal government. In this

jurisdiction, well-settled is the rule that public funds are not subject to levy and execution, unless otherwise provided for by statute

[Republic v. Palacio, supra.; The Commissioner of Public Highways v. San Diego, G.R. No. L-30098, February 18, 1970, 31 SCRA 616].

More particularly, the properties of a municipality, whether real or personal, which are necessary for public use cannot be attached

and sold at execution sale to satisfy a money judgment against the municipality. Municipal revenues derived from taxes, licenses and

market fees, and which are intended primarily and exclusively for the purpose of financing the governmental activities and functions

of the municipality, are exempt from execution [SeeViuda De Tan Toco v. The Municipal Council of Iloilo, 49 Phil. 52 (1926): The

Municipality of Paoay, Ilocos Norte v. Manaois, 86 Phil. 629 (1950); Municipality of San Miguel, Bulacan v. Fernandez, G.R. No.

61744, June 25, 1984, 130 SCRA 56]. The foregoing rule finds application in the case at bar. Absent a showing that the municipal

council of Makati has passed an ordinance appropriating from its public funds an amount corresponding to the balance due under

the RTC decision dated June 4, 1987, less the sum of P99,743.94 deposited in Account No. S/A 265-537154-3, no levy under

execution may be validly effected on the public funds of petitioner deposited in Account No. S/A 263-530850-7.

c. CIR v. Algue GR L-28896 FEB. 17, 1988FACTS: On January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other

allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes

for the years 1958 and 1959.On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was

stamp received on the same day in the office of the petitioner.

ISSUE: whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private

respondent Algue as legitimate business expenses in its income tax returns.

HELD: Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand;

such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It

is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real

purpose of taxation, which is the promotion of the common good, may be achieved.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the

motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to

the taxing authorities, every person who is able to must contribute his share in the running of the government. The government

for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people

and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the

erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it beexercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and

the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if

the taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent

court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was

permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner.

d. BPI-FAMILY SAVINGS BANK, Inc., vs. COURT OF APPEALS, COURT OF TAX APPEALS and the

COMMISSIONER OF INTERNAL REVENUE,G.R. No. 122480 April 12, 2000

FACTS: It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable amount of P297,492

inclusive of the P112,491.00 being claimed as tax refund in the present case. However, petitioner declared in the same 1989

Income Tax Return that the said total refundable amount of P297,492.00 will be applied as tax creditto the succeeding taxable

year.

On October 11, 1990, petitioner filed a written claim for refund in the amount of P112,491.00 with the respondent Commissioner

of Internal Revenue alleging that it did not apply the 1989 refundable amount of P297,492.00 (including P112,491.00) to its 1990

Annual Income Tax Return or other tax liabilities due to the alleged business losses it incurred for the same year.


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Without waiting for respondent Commissioner of Internal Revenue to act on the claim for refund, petitioner filed a petition for

review with respondent Court of Tax Appeals, seeking the refund of the amount of P112,491.00.

The respondent Court of Tax Appeals dismissed petitioner's petition on the ground that petitioner failed to present as evidence

its corporate Annual Income Tax Return for 1990 to establish the fact that petitioner had not yet credited the amount of

P297,492.00 (inclusive of the amount P112,491.00 which is the subject of the present controversy) to its 1990 income tax liability.

Petitioner filed a motion for reconsideration, however, the same was denied by respondent court in its Resolution dated May 6,1994. Respondent Courts contend that taxes must be applied strictissimi juris.

ISSUE: Whether or not petitioner is entitled to the refund of P112,491.90, representing excess creditable withholding tax paid for

the taxable year 1989

HELD: Petition granted.

CA gave judgment that is premised on a misapprehension of facts, or when the appellate court failed to notice certain relevant

facts which if considered would justify a different conclusion.

Petitioner claimed that it would apply its excess of withholding tax as a tax credit, however due to its losses it opted to apply for

a tax refund wherein the petitioner filed with the BIR and the latter failed to act on the issue, petitioner then filed with CTA andhas presumed that the Petitioner applied the excess of withholding tax as a tax credit for the following year. Respondent courts

have failed to look upon the attached documents for the application of tax credit.

Respondents argue that tax refunds are in the nature of tax exemptions and are to be construed strictissimi jurisagainst the

claimant. Under the facts of this case, we hold that petitioner has established its claim. Petitioner may have failed to strictly

comply with the rules of procedure; it may have even been negligent. These circumstances, however, should not compel the

Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in 1990, and that it could not have applied the

amount claimed as tax credits.

Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not be

misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abidingcitizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same

standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own example of honor,

dignity and uprightness.

3. Taxes distinguished from:

a. Debts- A tax is not a debt for the reason that a tax does not depend upon the consent of the taxpayer and there is

no express or implied contarct to pay taxes. (Dimaampao p. 32)

Tax Debt

An obligation imposed by law Created by contract

Due to the government in its sovereign capacity May be due to the government but in its corporate capacity


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Payable in money Payable in money, property or services

Does not draw interest except in case of delinquency Draws interest if stipulated or delayed

Notassignable Assignable

Not subject to compensation or set-off Subject to compensation or set-off under Art. 1278 of the Civil

Code

Non-payment is punished by imprisonment except in poll tax Noimprisonment in case of non-payment (Art. III, Sec. 20 1987

Constitution)

Imposed only by public authority Can be imposed by private individual

(San Beda Memory Aid p. 05) (Aban p. 18-22) (Dimaampao p. 32-35)

i. 71 Am Jur 2nd345-346

ii. Caltex v. COA, 208 SCRA 726

FACTS:The case involves questioning the authority of the Commission on Audit (COA) in disallowing petitioner's claims for

reimbursement from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of said Commission's decision denying its claims

for recovery of financing charges from the Fund and reimbursement of under recovery arising from sales to the National Power

Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and Marcopper Mining Corporation (MAR-COPPER),

preventing it from exercising the right to offset its remittances against its reimbursement vis-a-vis the OPSF and disallowing its

claims which are still pending resolution before the Office of Energy Affairs (OEA) and the Department of Finance (DOF).

ISSUE:Whether or not COA is authorized in disallowing petitioners claim for reimbursement

HELD: Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the Department of Finance todetermine or define "other factors" is to uphold an undue delegation of legislative power, it clearly appearing that the subject

provision does not provide any standard for the exercise of the authority. It is a fundamental rule that delegation of legislative

power may be sustained only upon the ground that some standard for its exercise isprovidedand that the legislature, in making the

delegation, has prescribed the manner of the exercise of the delegated authority.

Respondents, on the other hand, citing Francia vs.IAC and Fernandez,53

contend that there can be no offsetting of taxes against the

claims that a taxpayer may have against the government, as taxes do not arise from contracts or depend upon the will of the

taxpayer, but are imposed by law. Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised

Administrative Code, is misplaced because "while this provision empowers the COA to withhold payment of a government

indebtedness to a person who is also indebted to the government and apply the government indebtedness to the satisfaction of the

obligation of the person to the government, like authority or right to make compensation is not given to the private person." 54The

reason for this, as stated in Commissioner of Internal Revenue vs.Algue, Inc.,55

is that money due the government, either in the form

of taxes or other dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving petitioner a reason for

compensation or set-off, the Revised Administrative Code makes it the respondents' duty to collect petitioner's indebtedness to the

OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of taxation because "P.D.

1956, amended, did not create a source of taxation; it instead established a special fund . . .,"56

and that the OPSF contributions do


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not go to the general fund of the state and are not used for public purpose, i.e., not for the support of the government, the

administration of law, or the payment of public expenses. This alleged lack of a public purpose behind OPSF exactions distinguishes

such from a tax. Hence, the ruling in the Francia case is inapplicable.

We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose because they go to a special

fund of the government. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the

government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatenedindustry which is affected with public interest as to be within the police power of the state.

57There can be no doubt that the oil

industry is greatly imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could

hurt the lives of a majority of the people and cause economic crisis of untold proportions. It would have a chain reaction in terms of,

among others, demands for wage increases and upward spiralling of the cost of basic commodities. The stabilization then of oil

prices is of prime concern which the state, via its police power, may properly address.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the

subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for

taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

iii. Francia v. IAC, 162 SCRA 753

FACTS: Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio San Isidro,

now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters, is described and covered by

Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the

sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at

public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property

Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New Certificate of Title"

filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate of title.

Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City

Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No. 4739 (37795)

by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January 24, 1980.

The Intermediate Appellate Court affirmed the decision of the lower court in toto.Hence, this petition for review.

ISSUE:Whether or not the auction sale is valid.

HELD: YES. There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person

cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax is being

collected. The collection of a tax cannot await the results of a lawsuit against the government.

In the case ofRepublic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of

set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are

construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipalityto one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise

out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that

no set-off admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general

rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of duty to, and are the

positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required.

..."


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We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the

governmental body not included in the tax levy.

This rule was reiterated in the case of Corders v. Gonda(18 SCRA 331) where we stated that: "... internal revenue taxes can not be

the subject of compensation: Reason: government and taxpayer are not mutually creditors and debtors of each other' under Article

1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the

expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national government for

the 125 square meter portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his

remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The

petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would

have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at

public auction.

iv. Philex Mining Corp. v. CIR, CA and CTA, GR NO. 125704, AUG. 28, 1998

FACTS: Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R. SP No.36975

1affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995

2ordering it to pay the amount of

P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual

interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.

ISSUE: Whether or not the tax liability can be offset

HELD: In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to

compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other.17

There is a

material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the

Government in its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19we categorically held that taxes cannot be subject to

set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the

government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than

the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

The ruling in Franciahas been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit,20

which reiterated

that:

. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of

compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is

not such a debt, demand, contract or judgment as is allowed to be set-off.

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a

pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the

Commissioner,21

is no longer without any support in statutory law.

It is important to note, that the premise of our ruling in the aforementioned case was anchored on Section 51 (d) of the National

Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which

the Itogon-Suyocpronouncement was based was omitted.22

Accordingly, the doctrine enunciated in Itogon-Suyoccannot be

invoked by Philex.

We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifebl ood ofthe government and so should be collected without unnecessary hindrance.

24Evidently, to countenance Philex's whimsical reason

would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund

or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is

compulsory rather than a matter of bargain.25

Hence, a tax does not depend upon the consent of the taxpayer.26

If any taxpayer can

defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the


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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.27

Moreover,

Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion

and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities.

We agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the factual basis of his or her

claim for tax credit or refund,33

however, once the claimant has submitted all the required documents it is the function of the BIR to

assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that

government render fair service to the taxpayers.

v. Domingo v. Garlitos GR-L18994, june 29, 1963

FACTS: This is a petition for certiorariand mandamusagainst the Judge of the Court of First Instance of Leyte, Ron. Lorenzo C.

Garlitos, presiding, seeking to annul certain orders of the court and for an order in this Court directing the respondent court

below to execute the judgment in favor of the Government against the estate of Walter Scott Price for internal revenue taxes.

ISSUE: Whether or not the petitioner has a right to execute judgment against the estate

HELD: The petitioner has no clear right to execute the judgment for taxes against the estate of the deceased Walter Scott Price.

The petition to set aside the above orders of the court below and for the execution of the claim of the Government against the

estate must be denied for lack of merit. The ordinary procedure by which to settle claims of indebtedness against the estate of a

deceased person, as an inheritance tax, is for the claimant to present a claim before the probate court so that said court may

order the administrator to pay the amount thereof.

b. License Fees

Tax License Fee

Based on the power of taxation Emanates from police power

To generate revenue Regulatory

Amount is unlimited Amount is limited to the cost of (1) issuing the license, and

(2) inspection and surveillance

Normally paid after the start of a business Normally paid before commencement of business

Taxes, being the lifeblood of the State, cannot be

surrendered except for lawful consideration

License fee may be with or without consideration

Non-payment does not make the business illegal but maybe a

ground for criminal prosecution

Non-payment makes the business illegal

(San Beda Memory Aid p. 05) (Dimaampao p. 30-31) (Aban p. 16-18)

i. 71 Am Jur 2nd352-353

ii. PROGRESSIVE DEVELOPMENT CORPORATION, vs. QUEZON CITY, G.R. No. L-36081 April

24, 1989


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FACTS: On 15 July 1972, petitioner Progressive Development Corporation, owner and operator of a public market known as the

"Farmers Market & Shopping Center" filed a Petition for Prohibition with Preliminary Injunction against respondent before the then

Court of First Instance of Rizal on the ground that the supervision fee or license tax imposed by the above-mentioned ordinances is

in reality a tax on income which respondent may not impose, the same being expressly prohibited by Republic Act No. 2264, as

amended.

In its Answer, respondent, through the City Fiscal, contended that it had authority to enact the questioned ordinances, maintaining

that the tax on gross receipts imposed therein is not a tax on income. The Solicitor General also filed an Answer arguing that

petitioner, not having paid the ten percent (10%) supervision fee prescribed by Ordinance No. 7997, had no personality to question,

and was estopped from questioning, its validity; that the tax on gross receipts was not a tax on income but one imposed for the

enjoyment of the privilege to engage in a particular trade or business which was within the power of respondent to impose.

On 21 October 1972, the lower court dismissed the petition, ruling 3 that the questioned imposition is not a tax on income, but

rather a privilege tax or license fee which local governments, like respondent, are empowered to impose and collect.

ISSUE:whether the tax imposed by respondent on gross receipts of stall rentals is properly characterized as partaking of the nature

of an income tax or, alternatively, of a license fee.

HELD:The term "tax" frequently applies to all kinds of exactions of monies which become public funds. It is often loosely used toinclude levies for revenue as well as levies for regulatory purposes such that license fees are frequently called taxes although license

fee is a legal concept distinguishable fromtax: the former is imposed in the exercise of police power primarily for purposes of

regulation, while the latter is imposed under the taxing power primarily for purposes of raising revenues. 9Thus, if the generating of

revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose,

the fact that incidentally revenue is also obtained does not make the imposition a tax.

To be considered a license fee, the imposition questioned must relate to an occupation or activity that so engages the public interest

in health, morals, safety and development as to require regulation for the protection and promotion of such public interest; the

imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of

direct regulation but also its incidental consequences as well. When an activity, occupation or profession is of such a character that

inspection or supervision by public officials is reasonably necessary for the safeguarding and furtherance of public health, morals and

safety, or the general welfare, the legislature may provide that such inspection or supervision or other form of regulation shall be

carried out at the expense of the persons engaged in such occupation or performing such activity, and that no one shall engage in

the occupation or carry out the activity until a fee or charge sufficient to cover the cost of the inspection or supervision has been

paid. Accordingly, a charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a

tax rather than an exercise of the police power.

We believe and so hold that the five percent (5%) tax imposed in Ordinance No. 9236 constitutes, not a tax on income,not

a cityincome tax (as distinguished from the nationalincometax imposed by the National Internal Revenue Code) within the

meaning of Section 2 (g) of the Local Autonomy Act, but rather a license tax or fee for the regulation of the business in which the

petitioner is engaged. While it is true that the amount imposed by the questioned ordinances may be considered in determining

whether the exaction is really one for revenue or prohibition, instead of one of regulation under the police power, it nevertheless

will be presumed to be reasonable. Local' governments are allowed wide discretion in determining the rates of imposable license

fees even in cases of purely police power measures, in the absence of proof as to particular municipal conditions and the nature of

the business being taxed as well as other detailed factors relevant to the issue of arbitrariness or unreasonableness of the

questioned rates.

The use of the gross amount of stall rentals as basis for determining the collectible amount of license tax, does not by itself, upon

the one hand, convert or render the license tax into a prohibited city tax on income. Upon the other hand, it has not been suggested

that such basis has no reasonable relationship to the probable costs of regulation and supervision of the petitioner's kind of

business. For, ordinarily, the higher the amount of stall rentals, the higher the aggregate volume of foodstuffs and related items sold

in petitioner's privately owned market; and the higher the volume of goods sold in such private market, the greater the extent and

frequency of inspection and supervision that may be reasonably required in the interest of the buying public. Moreover, what we

started with should be recalled here: the authority conferred upon the respondent's City Council is notmerely "to regulate" but also

embraces the power "to tax" the petitioner's business.

. As a general rule, there must be a statutory grant for a local government unit to impose lawfully a gross receipts tax, that unit not

having the inherent power of taxation. 21The rule, however, finds no application in the instant case where what is involved is an

exercise of, principally, the regulatory power of the respondent City and where that regulatory power is expressly accompanied by

the taxing power.


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ACCORDINGLY, the Decision of the then Court of First Instance of Rizal, Quezon City, Branch 18, is hereby AFFIRMED and the Court

Resolved to DENY the Petition for lack of merit.

iii. PAL v. Edu, 164 SCRA 320

FACTS: The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the Philippines and engaged in the air

transportation business under a legislative franchise, Act No. 42739, as amended by Republic Act Nos. 25). and 269.1 Under its

franchise, PAL is exempt from the payment of taxes.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has, since 1956, not been paying motor

vehicle registration fees.

Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring all tax exempt entities, among

them PAL to pay motor vehicle registration fees.

ISSUE: Whether or not motor vehicle registration fees are taxes or regulatory fees.

HELD: Fees may be properly regarded as taxes even though they also serve as an instrument of regulation . Taxation may be made

the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148).

If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly

called a tax (Umali, Id.) Such is the case of motor vehicle registration fees. The conclusions become inescapable in view of Section

70(b) of Rep. Act 587 quoted in the Calalangcase. The same provision appears as Section 591-593). in the Land Transportation code.

It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration,

operation or ownership of a motor vehicle as a "tax or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the

imposition is a tax, Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership of any motor

vehicle, or for the exercise of the profession of chauffeur ..." making the intent to impose a tax more apparent. Thus, even Rep. Act

5448 cited by the respondents, speak of an "additional" tax," where the law could have referred to an original tax and not one in

additionto the tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act 41383. Simply

put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional"

tax. Rep. Act 4136 also speaks of other "fees," such as the special permit fees for certain types of motor vehicles (Sec. 10) and

additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to

be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the motor vehicle registration fee and

chauffers' license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last

proviso of see. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for rigidly purposes in the exercise

of the State's police powers. Over the years, however, as vehicular traffic exploded in number and motor vehicles became absolute

necessities without which modem life as we know it would stand still, Congress found the registration of vehicles a very convenient

way of raising much needed revenues. Without changing the earlier deputy. of registration payments as "fees," their nature has

become that of "taxes."

iv. ESSO v. CIR, 175 SCRA 149FACTS: On appeal before us is the decision of the Court of Tax Appeals

1denying petitioner's claims for refund of overpaid income

taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively

ISSUE: whether OR NOT R.A. 2009, entitled An Act to Authorize the Central Bank of the Philippines to Establish a Margin Over Banks'

Selling Rates of Foreign Exchange, is a police measure or a revenue measure.

HELD: Taxation; Police Power; Margin fee is not a tax but an exactiondesigned to curb the excessive demands upon international

reserves; Definition of Margin Levy; Distinguished from tax. Apart from the aboveconsideration, there are at least two cases wherewe have held that amargin fee is not a tax but an exaction designed to curb the excessivedemands upon our international reserve. In

Caltex (Phil.) Inc. v. Acting Commissioner of Customs, the Court stated through Justice Jose P.Bengzon: A margin levy on foreign

exchange is a form of exchange control or restriction designed to discourage imports and encourage exports, and ultimately, 'curtail

any excessive demand upon the international reserve' in order to stabilize the currency. Originally adopted to cope with balance of

payment pressures, exchange restrictions have come to serve various purposes, such as limiting non-essential imports, protecting

domestic industry and when combined with the use of multiple currency rates providing a source of revenue to the government, and

are in many developing countries regarded as a more or less inevitable concomitant of their economic development programs. The


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different measures of exchange control or restriction cover different phases of foreign exchange transactions, i.e., in quantitative

restriction, the control is on the amount of foreign exchange allowable. In the case of the margin levy, the immediate impact is on

the rate of foreign exchange; in fact, its main function is to control the exchange rate without changing the par value of the peso as

fixed in the Bretton Woods Agreement Act. For a member nation is not supposed to alter its exchange rate (at par value) to correct a

merely temporary disequilibrium in its balance of payments. By its nature, the margin levy is part of the rate of exchange as fixed by

the government.

We conclude then that the margin fee was imposed by the State in the exercise of its police power and not the power of taxation.

The public respondent is correct when it asserts that "the paramount rule is that claims for deductions are a matter of legislative

grace and do not turn on mere equitable considerations ... . The taxpayer in every instance has the burden of justifying the

allowance of any deduction claimed."

c. Special Assessments

- Exemption under Sec. 28 (3), Art. VI of the Constitution does not apply to specialassessments

- Sec. 240 of the LGC, properties which are actually, directly and exclusively used forreligious, charitable and educational purposes are not only exempt from real property taxes but areexempt from the imposition of Special Assessments as well. (Aban p. 16)

Tax Special Assessment

Imposed on persons, property and excises Levied only on land

Personal liability attaches on the person assessed in case of non-

payment

Cannot be made a personal liability of the person assessed

Not based on any special or direct benefit Based wholly on benefit

Levied and paid annually Exceptional both as to time and locality

Exemption granted is applicable (Art. VI, Sec. 28(3) 1987

Constitution)

Exemption does not apply.

N.B. If property is exempt from Real Property Tax, it is also

exempt from Special Assessment.

(San Beda Memory aid) (Dimaampao p. 30) (Aban p.15-16)

i. Apostolic Prefect of Mt. Province vs Treasurer of Baguio 71 Phil. 547FACTS: In 1937, an ordinance (Ord. 137) was passed in the City of Baguio. The said ordinance sought to assess properties of property

owners within the defined city limits.

APMP, on the other hand, is a religious corporation duly established under Philippine laws. Pursuant to the ordinance, it

contributed a total amount of P1,019.37. It filed the said contribution in protest. APMP later averred that it should be exempt from

the said special contribution since as a religious institution, it has a constitutionally guaranteed right not to be taxed including its

properties.

ISSUE: Whether or not APMP is exempt from taxes

HELD: The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution

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