General Principles

TAX LAW REVIEWERPart I - General Principles1. Taxation DefinedTaxation is the power by which the sovereign raises revenue to defray the necessary expenses of the government.

It is the means of apportioning the costs of governance among those who in some measure enjoy the privilege of its benefits and must bear its burden.2. Source Constitution

Statutes

Jurisprudence

Revenue regulations

3. Nature (ILL)1. Inherent attribute of sovereignty

It belongs to the State as a matter of right. It does not need of constitutional conferment. Constitutional provisions do not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible power.

Taxation being an attribute of sovereignty, its relinquishment is never presumed.

2. Legislative in character

The power cannot be exercised by other branches of the government except upon valid delegation.

This is based upon the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people. And where the people have laid the power, there it must remain and be exercised. Courts have no power to power to inquire into or interfere in the wisdom, objective, motive or expediency in the passage of a tax law, as this is purely legislative in character.

Scope of the legislative power to taxa. Discretion as to purposes for which taxes shall be levied Courts may review the levy to determine whether the purpose is a public one but once determined that the purpose is a public one, courts can make no other inquiry as to the purpose of the tax, as such inquiry affects the power to impose it.

Lutz v. Araneta: Protection and promotion of sugar industry is a matter of public concern. Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Such legislative discretion must be allowed full play, subject only to the test of reasonableness.

b. Discretion as to the subjects of taxation Inequalities which result from singling out of one particular class infringe no constitutional limitation. Punsalan v. City of Manila: It is not for the courts to judge what particular cities or municipalities should be empowered to impose occupation taxes in addition to those imposed by the National Government. The matter is peculiarly within the domain of the political departments and the courts would do well not to encroach upon it.

c. Discretion as to the amount or rate of tax The power may be carried out even to the extent of exhaustion or destruction, thus becoming in its exercise a power to destroy.

d. Discretion as to the manner, means and agencies of collection of taxes McCulloch v. Maryland (Marshall): The power to tax involves the power to destroy. It means that the power to tax includes the power to regulate even to the extent of prohibition or destruction, since the inherent power to tax vested in the legislature includes the power to determine who to tax, what to tax and how much tax is to be imposed.

Such maxim is used to describe not the purposes for which the taxing power may be used but the degree of vigor with which the taxing power may be employed in order to raise revenue. The power to tax includes the power to destroy if it is used validly as an implement of police power in discouraging and, in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare. But where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be allowed to confiscate or destroy. Otherwise, the tax statute may be successfully attacked as unconstitutional.

The power to tax is not the power to destroy as long as the Supreme Court sits.

The Constitution as the fundamental law overrides any legislative or executive act that runs counter to it. Thus, where it can be demonstrated that the challenged statutory provision fails to abide by its command, then the court must so declare and adjudge it null. As regards inferior courts, the power of judicial review should be exercised with due care and circumspection, considering not only the presumption of validity but also the relatively modest rank of a city court in the judicial hierarchy.

3. Subject to inherent and constitutional limitations

4. Bases Lifeblood doctrine. Government can neither exist nor endure without taxation. Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. The collection of taxes must be without hindrance if the state is to maintain its orderly existence. The governments ability to serve and protect the people depends largely upon taxes. Taxes are what we pay for a civilized society.

CIR v. Pineda (1967): The eldest son of the deceased who is an heir and holder-transferee of property belonging to the estate/taxpayer is to be treated:1) As an HEIR, he is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability cannot exceed the amount of his share.

2) As a HOLDER of property belonging to the estate, he is liable for the tax up to the amount of the property in his possession. REASON: The government has a lien on the value of the property received by him from the estate as his share in the inheritance for unpaid taxes for which the estate is liable pursuant to Sec. 219, NIRC. By virtue of such lien, the government has the right to subject the property in said heirs possession to satisfy the income tax assessment.

The second remedy (tax lien) is the avenue the government took in this case to collect the tax. The BIR should be given, in instances like the case at bar, the necessary discretion to avail itself the most expeditious way to collect the tax because taxes are the lifeblood of the government and their prompt and certain availability is an imperious need.

Vera v. Fernandez (1979): The statute of non-claims under Sec. 5, Rules 86 of the Rules of Court does not apply to taxation. The reason for the more liberal treatment of claims for taxes against a decedents estate is because taxes are the lifeblood of the government. Upon taxation depends the governments ability to serve the people for whose benefit taxes are collected.

CIR v. CTA and Citytrust (1994): The Government is not bound by the errors committed by its agents. Although it may generally be estopped through the affirmative acts of public officers acting within their authority, their neglect or omission of public duties will not and should not produce that effect. Government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State exercises its functions for the welfare of its constituents.

CIR vs. Algue (1988): 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 the 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 common good, may be achieved.

Reyes v. Almanzor (196 SCRA 322): Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for the 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 common good, may be achieved. Consequently, it stands to reason that those who are burdened by the government by its Rental Freezing Laws under the same principle of social justice should not now be penalized by the same government by the imposition of excessive taxes as such would eventually result in the forfeiture of their properties.

YMCA v. CIR (298 SCRA 83): Since taxes are the lifeblood of the nation, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. The claimed exemption must expressly be granted in a statute stated in a language too clear to be mistaken. Tax exemptions cannot be merely implied from the provisions of the law.

Marcos II v. CA (1997): The approval of the court, sitting in probate or as a settlement tribunal over the deceaseds estate, is not a mandatory requirement in the collection of estate taxes. The enforcement of tax laws and the collection of taxes are of paramount importance for the sustenance of the government. Taxes are the lifeblood of the government and should be collected without unnecessary hindrance.

PBCOM v. CIR (1999): Claims for refund or tax credit should be exercised within the time fixed by law. The BIRs functions should not be unduly delayed or hampered by incidental matters.

Necessity TheoryTaxation is a power predicated upon necessity. It is a necessary burden to preserve the States sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servant 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.

Benefits-Protection TheoryThe basis of the power of the State to demand and receive taxes is the reciprocal duties of support and protection. The citizen supports the State by paying the portion from his property that is demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society. The obligation to pay taxes is involuntary and compulsory, in exchange for the protection and benefits one receives from the government.

Doctrine of Symbiotic Relationship

Taxes are what we pay for a 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 to must contribute his share in the burden of running 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 material and moral values.5. Purposes of Taxation

Primary Purpose

1. To raise revenue

To provide funds with which the State delivers the basic services to the people. The government cannot simply be operated without the funds to finance its multifarious functions including the delivery of basic services, education, etc.

Thus, in case of deficit spending, the government resorts to borrowing, locally and internationally.

Secondary Purposes (non-revenue purpose)2. Regulation As an implement of police power Taxation has a regulatory purpose as in the case of taxes levied on excises or privileges (sin taxes) like those imposed on tobacco and alcoholic products, or amusement places like night clubs, cabarets, cockpits, etc.

But the power to tax must be exercised with caution to minimize injury to the proprietary rights of taxpayers. It must be exercise fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. Other example: Improperly accumulated earnings tax tax to regulate 3. Promotion of general welfare

As an implement of police power Lutz v. Araneta (98 Phil 148): SC upheld the validity of the Sugar Adjustment Act, which imposed a tax on milled sugar since the purpose of the law was to strengthen an industry that is undeniably vital to the economy the sugar industry.

Osmena v. Orbos (March 31, 1993): While the funds collected under the OPSF are 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 like increases in, as well as under-recovery of, the cost of crude oil importation.4. Reduction of social inequity

This is made possible through the progressive system of taxation where the objective is to prevent the undue concentration of wealth in the hands of few individuals. Progressivity is keystoned on the principle that those who are able to pay should shoulder the bigger portion of the tax burden. Examples: Income tax , donors tax, estate tax Taxes under NIRC are either proportionate or progressive. The latter is mandated by the Constitution (to evolve). Progressive means the tax rate increases as the tax base increases.5. Encourage economic growth

The law, at times, grants incentives or exemptions in order to encourage investments and, thereby, promotes the countrys growth.a. Tax Sparing Rule

b. Income tax holidays to allow pioneer industries to prosper; to enable them to recover their investment before being taxedc. PEZA-registered enterprises given tax relief (all forms); only 5% of their gross income is being taxed the reason being that these are export-oriented industries; so that their products will be competitive to the foreign market

6. Protectionism

It protects local industries from foreign competition, i.e., protective tariffs and customs duties Southern Cross Cement v. Sec. of finance (July 8, 2004): The Safeguard Measures Act allows the imposition of emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them. The power to impose general safeguard measure is vested upon the DTI Secretary upon compliance with two conditions, viz:1) there must be a positive final determination of the Tariff Commission that a product is being imported into the country in increased quantities, as to be a substantial cause of serious injury or threat to the domestic industry, and

2) DTI Sec. must establish that the application of such safeguard measures is in the public interest.

Destination-type VAT local products consumed within 10%

all products of the same kind (foreign) 10% VAT on top of excise

for export zero-rated

Taxes on supply and labor may be recovered in form of refund6. Objectives of Taxation Robust environment Sustainable economy

Equitable relief

7. Taxation vs. Other Inherent Powers of the StatePower to TaxPolice PowerPower of Eminent Domain

As to purposeTo raise revenue (regulation is incidental)To promote public welfare through regulation (revenue is incidental)To take private property for public use

As to amount of exactionContemplates no limitsExaction limited to cost of regulation, issuance of the license, or surveillance

As to benefits received by taxpayerNo special or direct benefit other than the fact that the government secures to the citizen that general benefit resulting from the protection of his person and the welfare of all.Similarly, no direct benefits are received yet a healthy economic standard of society is maintainJust compensation is given the owner of the expropriated property (A particular person is affected)

As to superiority of ContractsRecognizes the obligations imposed by contractsDoes not apply

As to transfer of property rightsTaxes paid form part of public fundsAllows merely the restraint on the exercise of property rights

As to persons affectedApplies to all persons, property and excises that may be subject theretoOnly a particular property is comprehended

8. Extent of the Taxing Power Comprehensive. It covers persons, businesses, activities, professions, rights and privileges. Unlimited. Unlimited in force and so searching in extent that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. Plenary. It is complete. BIR may avail of certain remedies to ensure the collection of taxes. Supreme. Insofar as the selection of the subject of taxation is concerned. 9. Basic Principles of a Sound Tax System (FAT)1. Fiscal Adequacy the sources of government revenue must be sufficient to meet government expenditures and other public needs (not excessive, not deficient). This is essential to avoid budgetary deficits and to minimize foreign and local borrowings. This is in consonance with the lifeblood doctrine. A violation of this principle will not render the tax law unconstitutional or invalid because there is no constitutional provision or statute which mandates the observance of this principle. Thus, even if a tax law were enacted in violation of this principle, the tax law would remain valid. It merely affects the SOUNDNESS of the system of taxation.2. Administrative Feasibility Tax laws should be capable of being effectively and efficiently enforced. Hence, it must not lay down obstacles to business growth and development. This principle requires that each tax law should be

a. clear and plain to the taxpayers

b. capable of enforcement by an adequate and well-trained staff of public officialsc. convenient as to the time and manner of payment

d. not unduly burdensome upon or discouraging business activity.

A violation of this principle will not render the tax law unconstitutional. It merely affects the SOUNDNESS of the system of taxation. Kapatiran v. Tan (163 SCRA 371): VAT law is principally aimed to rationalize the system of taxes on goods and services, SIMPLIFY tax administration, and make the system more equitable to enable the country to attain economic recovery.

Government should come out with simple law/rules so the taxpayers can easily comply especially our tax system is based on self-assessment/voluntary compliance system.

3. Theoretical Justice This is the principle behind the progressive system of taxation. It means that the stress on a set of revenue laws is on ability to pay, which means that those in a better financial position to pay are taxed more than those who are not. Equitable tax system; to comply with constitutional mandate. A violation of this principle will render the tax law unconstitutional. This principle calls for VERTICAL EQUITY those who have more income should pay more. (versus HORIZONTAL EQUITY all taxpayers belonging to the same class must be taxed alike)

-------------

4. Economic Efficiency. The tax system must not distort the decision of businessmen as to what businesses to put up. Likewise, the system of taxation must not distort the decision of the consumers as to what to consume.

Example: Original sales tax before VAT

10% - essential articles

20% - semi-essential

30% - luxury item

Such system distorts the economic decisions of businessmen. If you were a tax-conscious businessman, you would not want to manufacture luxury items because the tax is high. This system encourages people to manufacture low-end articles.

Only a unitary rate of tax will remove the distortion. With VAT, there is a unitary rate. Everything else being equal, they can do whatever they want. A unitary rate of tax will encourage competition. It will insure that the tax system will not have an inflammatory effect on prices. Only the law on supply and demand will determine the prices. Fiscal adequacy and Administrative feasibility Adam Smith. Fiscal adequacy, Administrative feasibility, economic inefficiency affects soundness, if not followed will not render the tax law unconstitutional. Theoretical justice if not followed, will render the tax law unconstitutional. It is a constitutional limitation. 10. TAXES Taxes

It is the product of the exercise of the power.

Taxes are enforced social contributions from persons and property, levied by the state by virtue of its sovereignty for the support of the government and for all its public needs.

Exaction that is collected by the government from all persons, property and privileges within its jurisdiction.

Basic Characteristics

1) Enforced contributions anybody within the taxing authority can be compelled to contribute2) Collected for public purpose 3) Pecuniary in nature/character - capable of economic valuation

Q: Is payment of taxes in kind violative of the administrative feasibility principle?

A: No. But there will be a never-ending dispute as to what value is to be given to the property (TP high price; BIR low price). BUT the tax law will still be legal because administrative feasibility is not a requirement for the validity of tax law. It is merely a principle to ensure the soundness of a tax system. Argument:

Constitutional constraints. No money shall be taken from public funds without an appropriation law duly enacted.

4) Collected from all persons, property, privilege within its jurisdiction5) Must be collected during regular intervals

11. VIS--VIS THE OTHER FORMS OF EXACTIONa. Taxes vs. License FeesTaxLicense

SourcePower to taxPolice power

PurposePrimarily, to raise revenueRegulation

AmountNot so limited because of the enormous need of the governmentMinimal amounts just sufficient to defray cost of regulation

Subject MatterLegal or illegallegal

Non-payment of license fee will make the business illegal

Time of paymentAfter income has been earnedPaid at the commencement of business operation

Road users tax environmental tax. Higher registration fee for old models as they contribute to pollution. PAL vs. Edu: (Obiter) Motor vehicle registration fee is in the form of a tax and the nomenclature given to it is immaterial. Reason: Large portion is for road maintenance and only a very minimal amount is used for regulation.

Under Sec. 32 (income from whatever source), Illegal activities are also taxable. To do otherwise would place illegal activities in a better position than legal ones. BUT because our taxing system is self-assessing, nobody would declare his income from illegal activity. Thus a jueteng operator, though not subject to a license fee, should be subject to tax. Matalim Coconut v. Mun. of Malabang

An ordinance imposing a police inspection fee of 75 cents for every bag of cassava flour that is being shipped out from the Municipality of Malabang does not impose a license fee. The amount of exaction is huge enough to be considered as tax and there is actually no regulation involved. But whether a license fee or a tax, the ordinance is unconstitutional for being excessive as the shipper realizes only P1/bag. This amounts to confiscation of property without due process of law.b. Tax v. Toll Tax is a demand of sovereignty for the purpose of raising revenues. Toll is a demand of proprietorship, an amount charged for the cost and maintenance of the property used.c. Tax v. Penalty Tax is a civil liability. A person is criminally liable in taxation only when he fails to satisfy his civil obligation to pay taxes. Penalty is a punishment for the commission of a crime. Tax may be allowed as deduction from gross income. Penalty is not allowed to be deducted from gross income. It will defeat the purpose of the penalty. d. Taxes vs. Debts (ordinary monetary obligation)TaxDebt

As to PrescriptionGoverned by tax statuteNCC

SourceLaw; positive acts of governmentContracts, express or implied

InterestsNo interest upon delinquency EXCEPT as provided by law (NIRC, Sec. 29: once taxes become delinquent, 20% per annum until fully paid)With interests; once debtor becomes in default, the obligation bears interest whether or not there is a stipulation

Mode of paymentPayable in moneyPayable in money, property or services

W/N can be set-offNot subject to set-off*Can be set- off/ legal compensation

AssignabilityCant be assignedCan be assigned

Due to the government in its sovereign capacityDue to the government in its corporate capacity

*Whether of not taxes can be subject of set-off

Republic v. Mambulao Lumber ( Feb 1963): Mambulao is liable to pay forest charges on account of having gathered forest products. But the government owes Mambulao certain amount of money for services rendered by Mambulao. When the government tried to collect from Mambulao, the latter refused to pay. Held: Taxes and debts are of different nature. Thus, they can not be set off. Taxes are the lifeblood of the nation. Its availability is an imperious need. The government must collect first the tax due.

Domingo v. Garlitos (June 1963): SC reconsidered Mambulao ruling. It held that if BOTH obligations are overdue, demandable, as well as fully liquidated, then compensation takes place and the obligations are extinguished as to their concurrent amount. IAC vs. Francia, Caltex v. COA, Philex Mining v. CIR: reverted to Mambulao Francia: Property was expropriated by the government so the government is liable to pay just compensation. But property owner (Francia) has delinquent taxes. Held: Obligations are of different nature. Taxes cannot be offset against an ordinary monetary obligation. But, Garlitos case is not an exception to the general rule because there are requirements to be considered. Both obligations must be due, demandable, and fully liquidated. Philex Mining case: Philex owed the government mining taxes. Philex refused to pay because it had a multi-million pending claims for refund of input tax. SC did not allow set off because Philexs claim was not yet fully liquidated. No final determination as yet as to how much the refund was. Its tax liability, on the other hand, had been fully liquidated. Thus, any offset is premature.

Re: Demandable: Taxes are demandable when not paid on the due date. With regard to assessed taxes, the latter becomes due when the assessment has become final under sec. 228, NIRC. Fernandez .v Mun. of SMB: Debt, when demandable?

In this case, the municipality owed certain private contractors an amount of money for services rendered. The private contractors demanded payment from the municipality but the latter refused. Judge Fernandez issued a favorable judgment. A writ of execution was issued. The judge issued a warrant of arrest against the Mun. Treasurer. The latter went to SC under Rule 65. Held: Treasurer is correct. There must be an appropriation ordinance. The remedy of the contractor is to file a petition for mandamus to compel the municipal council to enact an ordinance for the purpose of appropriating funds for the payment of the obligation. In Garlitos, there was already an appropriation act for the purpose. What remains to be done is the physical delivery of the money. SET OFF only if: (1) Due, (2) Demandable, (3) Fully liquidated, and (4) Theres an appropriation ordinance

e. Taxes vs. Special levy A special assessment is in the nature of a tax upon a property levied according to the benefits conferred on the property. Property against which it is levied derives some special benefit from the improvement.

Distinctions: Special assessment

Levied only on lands

Cannot, as a rule, be made a personal liability of the persons assessed

Based wholly on benefits

Exceptional as to both time and locality

The imposition of a charge on all property, real or personal, in a prescribed area, is a tax, not an assessment, although the purpose is to make a local improvement on a street or highway. A charge imposed only on property owners benefited is a special assessment rather than a tax. The power to levy such assessments is undoubtedly an exercise of the taxing power, but the exercise of the taxing power in imposing an assessment does not necessarily make an assessment a tax.12. CLASSIFICATION OF TAXES (SBAPSG -- subject matter, burden, amount, purpose, scope, gradation)A. Subject matter: personal, capitation, poll, property, excise1. Personal tax. Tax on individuals, whether citizen or not, residing within a specified territory, without regard to their property and occupation.

Basic community tax P5

Additional, not to exceed P5T P1 for every P1T

Salaries from gross receipts or earnings from other occupation P1/P1T

The basic community tax of P5 is not based on income. If a tax is payable under a community tax certificate, the tax is not necessarily a personal tax. The personal tax therein is only the basic community tax of P5, for which a person, under the Constitution, can not be imprisoned for nonpayment thereof. Reason for the provision: Framers of the Malolos Constitution considered it as an affront if one will be imprisoned for not paying a minimal amount.

Thus, if referring to income or property, taxpayer may be imprisoned.

Poll tax/capitation/community taxes. Based upon the residence of the taxpayer, regardless of the source of income or location of the property of a tax payer.

Community tax - basic

Excise tax tax on a privilege (all NIRC taxes); DST is an excise tax; Income tax tax on the privilege to earn

Ad Valorem based on the value of the property

2. Property tax real property tax

B. AS TO BURDEN OF THE TAX

1. Direct tax demanded from the person intended directly to pay it and that person cannot shift the burden to someone else

Examples: Real property tax, income tax, transfer tax, residence tax2. Indirect tax demanded from one person but expected to shift it to someone not in form of tax but as part of the cost

Statutory incidence (Who is the taxpayer- who is required to pay?) versus Economic incidence (Who bears the burden? Who in reality shoulders the burden of the tax?)

If statutory incidence and economic incidence fall on one person, it is a DIRECT TAX.

VAT under Sec. 105, the statutory incidence is on the seller but the economic incidence is on buyer. Shifting is always presumed. There are 11 components in the invoice.

In case of indirect tax and the tax is not paid, the government can not go after the buyer.

C. AS TO AMOUNT 1. Specific based on the number or some other forms of weight and measurement

Examples:

Tax on leaded gas per liter

Tax on distilled spirits based on proof

Tax on fermented liquor gauge liter

Cigarette per stick

2. Ad Valorem based on value

Real property tax

Estate tax - based on the value of the property left by the decedent

Income tax based on the value of the income

Q: Which is easier to administer, specific or ad valorem?A: Specific tax. You do no go beyond counting. In ad valorem, there is a tendency for the taxpayer to lower the prices as exemplified by Fortune Tobacco case. Formerly, cigarette is subject to ad valorem tax. It was taxed on original sale. Fortune Tobacco incorporated nine (9) marketing corporations. Fortune sells its tobacco to its marketing companies.

P1.00 (taxed)

P5.00 (not taxed)

Fortune Marketing co. Public

Thus, the government reverted to specific tax system.

However, the problem with SPECIFIC taxation is that it fails to capture the effects of inflation. Cost of cigaretteSpecific taxTax

BeforeP10/packP1/pack10% (P1 is 10% of P10)

10 years laterP100/packP1/pack1% (P1 is 1% of P100)

Excise tax indexation was designed to capture the effects of inflation.

In an evolving economy, ad valorem is preferred against purely specific.

D. AS TO PURPOSE (General or Special)1. General needed for general purpose; tax collected will accrue to the general fund2. Special - must be utilized for the special purpose alone. Otherwise, there would be technical malversation. If the purpose had already been accomplished or abandoned, that is the only time that the amount collected can be used for other purposes.E. AS TO SCOPE1. National imposed by the NIRC, Tariff and Customs Code2. Local imposed by the local taxing authorityF. AS TO GRADATION

1. Progressive the tax rate increases as the tax base increases2. Regressive tax rate increases as the tax base decreases3. Mixed at certain point progressive, then regressive. The Constitution calls for UNIFORMITY.

All indirect taxes are regressive taxes.

Atty. Abella: VAT is not really a regressive tax. The rate is FLAT. It is regressive only because of the impact of the tax burden on different taxpayers.

Impact of the tax burden = amount paid by a consumer as a percentage of his disposable income. For example, a person earning P10,000.00 (net of income tax) a month eats a P100-meal @ Jollibee. At 10% rate of VAT, he pays P10 or .01 percent of his disposable income (P10,000.00) for that meal. Whilst, a consumer earning P100,000.00 (net of income tax) a month who also eats a P100-meal @ Jollibee also pays P10 in VAT if the rate is 10%. This amount is just .001 percent of his disposable income (P100,000.00). The impact is high on low income earner and negligible on high income earner. We do not adhere to tax cascading, at tax upon a tax situation.

13. LIMITATIONS UPON THE POWER TO TAXA. INHERENT LIMITATIONS proceed from the exercise of the power itself

If a tax measure violates an inherent limitation, the tax statute is NOT valid. It is unconstitutional. All the inherent limitations of the power to tax have their basis on the due process clause. (Pepsi Cola v. Mun. of Tanauan) 1. Public purpose This limitation requires that proceeds of taxation be used to support the existence of the government or the pursuit of governmental objectives.

Should it be present in the following stages: levy, assessment, and collection? YES, up to the time the tax money is SPENT.Pascual v. Sec. of Public Works: Tax law invalid because the public purpose requirement was not present at the time the tax ordinance was passed. The appropriation of an amount for the construction of a feeder road owned by a private individual is not proper. The provision that the land shall thereafter be donated to the government does not cure the defect.

Thus, if the purpose is the construction of a public school building on a private lot, the tax law is not valid. The government should first expropriate the property.

If the public advantage or benefit is merely incidental in the promotion of a particular enterprise, such defect shall render the law invalid. On the other hand, if what is incidental is the promotion of a public enterprise, the tax law shall be deemed for a public purpose. Legislature determines public purpose. Sugar industry is a national concern (Lutz V. Araneta)

The eradication of a dreaded disease is a public purpose. It need not be a direct benefit or a return for what the taxpayer pays. The benefit may be that enjoyment of the privilege of living in an organized society. Bagatsing v. Ramirez: The delegation of the collection of market stall fees to a private corporation does not affect the public purpose of the imposition. The fees collected do not go directly to the private coffers of the corporation. The right to tax depends upon the ultimate use, purpose and object for which the fund is raised. It is not dependent on the nature or character of the person or corporation whose intermediate agency is to be used in applying it. Where an assailed tax measure is not for public purpose, such an act is tantamount to confiscation of property.

Direct and indirect public benefit. As long as the ultimate result favors the welfare of the public in general.

2. Territoriality (Jurisdictional Sec. 23 Resident, Non-resident, Citizen, Alien) - most important: SITUS

The taxing power of a country is limited to persons properties and privileges within its territory. Situs is the place or state which has the power to impose a tax upon a person, property or privilege. Congress, by law, determines situs. It depends on the nature and character of the tax and the object sought to be achieved.

Rules on situs:a. Real property tax property located within

b. Personal property domicile of the owner following the principle of Mobilia sequuntur personam (Movables follow the person).

Mobilia sequuntur personam

Movables follow the person. Although a mere fiction of law, without any constitutional foundation, it is nevertheless applied when convenient --

(1) provided it is not inconsistent with express provisions of the law, or (2) when its application would result in injustice, or (3) unless such property has acquired a situs elsewhere.

To acquire a situs in a state other than the domicile of the owner, tangible property must have a definite location here, accompanied by some degree of permanency; mere temporary or transient presence in the state is not sufficient. Thus in case of shares of stock, its situs for purposes of taxation is the state in which they are permanently kept regardless of the domicile of the owner or the state in which the corporation was organized.

Wells-Fargo Bank: Shares of stock left by a non-resident alien decedent in an anonymous partnership in the Philippines are subject to Philippine inheritance tax notwithstanding the mobilia rule. The mobilia rule should yield to reason. The shares of stock are also taxable in the situs of their actual location, i.e., the Philippines. TRANSFER TAXES: Sec. 104, RA 8424: Properties which have acquired situs in RP:a. Franchise exercised in RP

b. S/S, obligations, bonds issued by domestic corporations organized and constituted in accordance with RP laws;

c. S/S, obligations, bonds issued by a foreign corporation where 85% of its business is located in the Philippines (subject to donors and estate tax);

d. S/S, obligations, bonds issued by foreign corporations which has acquired business situs when such have been used in the furtherance of the business of the foreign corporation;

e. Shares/rights in a partnership business or industry established in RP

These properties are considered situated, thus taxed, in RP, the residence of their owners is immaterial.

RULE: Irrespective of the owner, donors tax or estate tax can be imposed upon these properties

EXCEPT where the foreign country grants exemption or does not impose taxes on intangible properties of Filipino citizens.

Example: donation of S/S made by a FC are not subject to tax. However, if the transaction falls under par. c or d, the donation shall be subject to tax. The income of intangible properties like royalties and dividends are subject to taxes (Secs. 24, 25, 27, 28, RA 8424).

c. Community Tax taxable if resident for a period of at least six (6) months (180 days).d. Excise Tax imposed on the exercise of a right or privilege Income tax (sec. 23)

Criteria: Place

Nationality

Residence

1) Resident citizens and domestic corporations taxable within and without

2) NRC, RA, NRA, FC taxable only within

CIR v. BOAC: (2005 Bar Exam Ruling no longer applies in view of the new provision in the Tax Code)

This case was discussed in income taxation. Gross receipts and origination rule.

Transfer tax (Sec. 85)

Criteria:

1) Residence of the transferor RC/DC

2) Nationality of the transferor RC/DC

3) Location of the property within RP

NRA property situated within, taxable.

EXCEPT: Section 104 (reciprocity rule)

All others, taxable wherever situated.

Business tax taxed on conducted within

VAT place where the transaction is made Double taxation Definition When the same property is taxed twice when it should be taxed but once; both taxes must be imposed

on the same property or subject matter,

for the same purpose,

by the same state, government or taxing authority,

within the same jurisdiction or taxing district,

during the same taxable period, and

the same kind or character of tax.

Kinds of Double Taxation

1. Direct double taxation (prohibitive double taxation taxing twice by the same authority, for the same purpose, in the same year, some of the property in a given territory in which the tax is laid without taxing all of them the second time This type of double taxation is prohibited by the Constitution as it violates the rule on UNIFORMITY.

2. Indirect double taxation This type of double taxation is NOT prohibited. Thus, a lessor who derives rental income from his land may be required to pay income tax on the net rentals, real estate tax on the assessed value of the land, and community tax, also on the assessed value of the land. (Villanueva v. City of Iloilo, 26 SCRA 578) International Double Taxation Tax on the same SUBJECT MATTER

Tax on the same PERIOD

Tax by DIFFERENT TAXING AUTHORITY/JURISDICTIONExample: Income of a resident citizen from a foreign country adopting the source principle in imposing income tax Thus, this is not a direct duplicate taxation because it is being imposed by different taxing authorities. This does not constitute the prohibited type of double taxation.

There is no law that prohibits double taxation, what is violated is the UNIFORMITY RULE because taxed twice when it should be taxed only once. Tax situs for income tax purposes: Sec. 23

Sources of income (Sec. 42)

Sale of shares of stocks of a domestic corporation is an income from within irrespective of the place of sale.

Remedies against International Double Taxation: Reciprocal tax exemption

Tax deduction Tax credit

Tax refund

1) Reciprocal tax exemption

Sec. 104, NIRC Rule on reciprocity in limited context (only in cases of intangible personal property) Treaty provisions

2) Tax deduction amount allowed by law in order to reduce tax due

Ex. Business expenses Sec. 34Q: Are income taxes paid in foreign country allowed as deductions?

A: Yes, BUT the taxpayer must not have signified his intention to avail claim it as tax credit (Sec. 34).

3) Tax credit reduction of tax liability (vs. tax deduction which is the reduction of the tax base) Tax CREDIT is better. The liability itself is reduced. Income taxes paid in foreign country to avail of tax credit, taxpayer must signify his intention to avail tax credit; otherwise, will only be allowed as deduction

Senior Citizens Discount/Central Luzon Drug Case (2006): 1995 TRANSACTIONS. Old Senior Citizens Law provides that discounts given to senior citizens may be availed of as tax credit by the establishment. SC said in a 2006 decision that theres no room for interpretation. The law explicitly provides that discounts given may be availed of as tax credit.

Comment: Lugi ang government. Tax CREDIT reduces tax liability, not tax base. If total discounts given amount to P500K and total taxable income is P10M, tax due at 35% is P3.5M. If discounts given (P500K) is to be availed of as tax credit, tax due is P3M only.

Whereas, if it will only be allowed as tax deduction, discounts given in the amount of P500K will be deducted from the tax base of P10M, so taxable income will be P9.5M. At 35%, tax due is P3.325M.

Take note, Senior Citizens Law was enacted to favor senior citizens, not the establishments giving discounts. The discounts given are income which should have been realized, were it not for the law mandating the giving of discounts to senior citizens. So, it is but proper to deduct the discounts given from the gross income, not from the tax base.

On March 4, 2004, RA 9257 otherwise known as the New Senior Citizens Law took effect. Under said law, discounts given should be treated as TAX DEDUCTION, not as tax CREDIT. But said law cannot be made to apply to Central Luzon Drug Case because said case involves 1995 transactions.14. Non-delegability of the power

General Rule: Power to tax is non-delegable.

Power to fix the object, purpose and rate

Exceptions:

1) to the President (Art. VI, Sec. 28 (2)) flexible tariff rule (Secs. 104 and 401 of TCC)The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.

Q: Is the President empowered to fix the rate of internal revenue taxes?

A: No. There is no provision on such power in the Constitution.

Comment: Theres this newspaper article which says that the President has the power to fix the rate of internal revenue taxes allegedly on the basis on Art. VI, Sec. 28 (2) because of the phrase other other duties or imposts. Such is a wrong interpretation following the principle of EJUSDEM GENERIS. Other must be construed in line of the enumerated duties and imposts.

Q: Can Congress delegate the power to fix the rate of internal revenue tax to the President?

A: Two schools of thought:

The President has no power. Congress cannot delegate the power to fix the rate of IRT. Art. VI, Sec. 28(2) refers only to TARIFF rates, imposts (only for TCC), following the principle of ejusdem generis.

More liberal view. The power to fix the rate can be delegated provided there are sufficient standards because in that case, the President is merely implementing, NOT legislating.

Q: Suppose a law is passed by Congress allowing the President to raise the rate of VAT to 12% if any of the following conditions has been satisfied: 1) VAT collection as a percentage of GDP of the previous year exceeds 2 4/5%; or 2) National Government deficit as a percentage of GDP for the previous year exceeds 1 %. Is the delegation valid?A: YES. In such a case, the President was not given discretion as to what rate of tax is to be imposed. Neither was she given the absolute discretion to increase the rate. There are conditions that must be present before she could exercise her discretion to increase the rate. ABAKADA Case: (The facts are simple. New VAT law was passed. Alam nyo na yun.) Here are the issues but dont forget na delegation to the executive department as an exception to non-delegability of the power to tax ang topic ditto, isinama ko lang yung ibang issues sa 2006 VAT case: 1. ORIGINATION RULE: What must originate exclusively from the Lower House is not the law but only the revenue bill. Senate may propose or concur with amendments. The same Tolentino case on old VAT law.2. DELETION OF NO PASS ON PROVISION:

VAT is indirect tax. It must necessarily be passed on to consumers. Otherwise, it will cease to be an indirect tax.

This matter (whether to pass or not to pass) is a political question; this is not justiciable..3. DELEGATION/STAND-BY AUTHORITY OF THE PRESIDENT Nothing is delegated to the President. The law provides for conditions and the Secretary of Finance, in determining whether the conditions are present, acts as AGENT of the legislative department.4. LIMIT OF 70% CREDIT: Tax credit is not a matter of right. It is a matter of privilege. So, credit could be limited up to a certain percentage.2) to the local government units (Art. X, Sec. 5 of the 1987 Constitution; Sec. 132, RA 7160)

SECTION 5.Each local government unit shall have the power to create its own sources of revenues and 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.

Pepsi Cola v. City of Butuan: The theory of non-delegation of legislative power does not apply to maters of local concern. Old case: Even if no such Constitutional provision, LGU has the power to tax because the power to create LGU by implication confers upon it the power to tax. 3) to the administrative bodies Tax legislation (covers levy and imposition) not delegable to administrative bodies. It refers to the elements that enter into the imposition of the tax. The scope of legislative taxing power (power to tax) extends to the following:a. the subject (person, property or occupation to be taxed)b. the amount or rate of the tax

c. the purpose for which taxes shall be levied (public purposes only)

d. the kind of tax to be collected

e. the apportionment of the tax (general or limited to a particular locality)

f. the situs of taxation

g. the method of collection Tax Administration delegable to administrative bodies (assessment and collection functions) METHODS of TAX COLLECTION: Tax Legislative Scheme and Voluntary Compliance Scheme

15. Exemption of Government to tax Income of the government in exercising purely governmental functions is not subject to tax. (unless expressly TAXED) (Sec. 32B) If what is involved is the exercise of the government of a PROPRIETARY function, its income is subject to tax. (unless expressly EXEMPT)

Reason: The government should not be allowed to compete with private individuals and get the advantage of not being subject to tax.

Sec. 27 (C), NIRC: Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity.

General Rule: Corporations exercising proprietary functions, income taxable.

Exceptions:

GSIS

SSS PHIC PCSO PAGCOR

Properties of the national, as well as the local government, are not subject to tax, otherwise, it would result in the absurd situation of the government taking money from one pocket and putting it in another.Q: May the national government impose a tax on local governments?

A: There is no prohibition, constitutional or inherent, in taxation, against the imposition of taxes by the State on its political subdivisions. Accordingly, although it would be unusual, the national government can validly impose taxes on local governments.

Q: May the local government impose a tax on the national government?A: In McCulloch v. Maryland, the doctrine that the power to tax involves the power to destroy was, among other reasons, used to support the holding that states of the union are prohibited from taxing the US Federal government. If, indeed, taxation involves the power to destroy, then it cannot be exercised on that which the taxing authority has the power to destroy. Despite then the absence of any explicit statutory or constitutional prohibition, local governments may not impose any kind of tax on the national government.

The 1991 Local Government Code expressly provides that local governments cannot tax the National Government.

16. International Comity Principle of reciprocity

Respect of one sovereign in favor of another sovereign; a sovereign cannot exercise jurisdiction over another sovereign Generally accepted principles of international law shall form part of the law of the land and policy of peace, equality, justice, freedom, cooperation and amity. Sovereign Equality Among States Ex. US embassy; property of a foreign government; income taxes of foreign goverment CIR v. S.C Johnson and Sons, Inc., June 1999: On the application of the Most favored nation clause the phrase under similar circumstances refers to the payment of the tax and not in the payment of royalties.A. CONSTITUTIONAL LIMITATIONS

1. Due process clause

SECTION 1, Art. III, 1987 Constitution. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.

Reasonableness of the exaction As a substantive limitation, this means that the power to tax can be resorted to only for constitutionally valid public purpose and that the subject of taxation be within or has a situs in the taxing jurisdiction.

When an inherent limitation is violated, there is a violation of SUBSTANTIVE DUE PROCESS (taking of property without due process of law)

As a procedural limitation, it prohibits the state from utilizing any form of assessment or review which is arbitrary or unfair or which may deny a taxpayer a fair opportunity to assert his substantial rights before a competent tribunal. If procedures intended to protect taxpayers are not followed, then there is a denial of PROCEDURAL due process. (Assessment, etc.) The following are illustrative of violations of due process clause:

If the tax amounts to a confiscation of property;

If the subject of confiscation is outside the jurisdiction of the taxing authority;

If the law is imposed for a purpose other than a public purpose;

If the law which is applied retroactively imposes unjust and oppressive taxes; Arbitrary or oppressive methods are used; and

Where the law is in violation of inherent limitations.

Reyes v. Almanzor: The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, as it can be shown to amount to a confiscation of property. But mere allegation is not enough. There must be a clear and unequivocal breach of the Constitution and proof of arbitrariness. CIR vs. CTA and Fortune: When an administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.2. Equal protection clause (Rule on uniformity and equity)Sec. 1, Art. III - .. nor shall any person be denied of the equal protection of the laws.

SECTION 28.(1) The rule of taxation shall be uniform and equitable. Equality of taxation is accomplished when the burden of tax falls equally and impartially upon all persons and property subject to it, so that no higher rate or greater levy in proportion to value is imposed upon one person or species or property than upon others similarly situated or of like character. The Constitution requires UNIFORMITY, not equality in taxation. Uniformity means that all properties or other taxable subjects belonging to the same class be taxed at the same rate or measure, otherwise, it is discriminatory. Equity means that the apportionment of the tax burden among the taxpayer be just or equitable taking into account the taxpayers ability to pay the burden. Ability to pay means that the subjects of the state must contribute to government support as nearly as possible in proportion to the revenue/income which they respectively enjoy under the protection of the state. City of Baguio v. De Leon: Uniformity and equality. Equality and uniformity in taxation means that all taxable articles or kind of property of the same class be taxed at the same rate. A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found. Pepsi Cola v. City of Butuan: Uniformity in taxation, requiring all subjects or objects or objects of taxation similarly situated, to be treated alike or on equal footing, does not disallow a classification of such objects as long as the standards used therefore are not arbitrary, and germane to the intendment of the law, and are substantial. Shell v. Vano: Inequalities resulting from the singling out of one particular class from other classes do not infringe the Constitution. Ormoc Sugar Central v. City of Ormoc: Ordinance in this case is unconstitutional. It taxes only the produce of Ormoc Sugar Co. It is true that at the time of its enactment, Ormoc Sugar Co. was the only sugar central in the city. However, the ordinance, as worded, is not applicable to future conditions. PAL v. Sec. of Finance: Regressive taxes do not go against the constitutional mandate that Congress shall evolve a progressive system of taxation. The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it imply provides is that congress shall evolve a progressive system of taxation. Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers ability to pay.

Classification, when proper when reasonable, i.e., must satisfy the following:a. It must be based on substantial distinction

b. It must apply both to present and future conditions

c. It must be germane to the purposes of the law

d. It must apply equally to all members of the same class.

3. Progressive taxation

The Congress shall evolve a progressive system of taxation.

Taxation is progressive when its rate goes up depending on the resources of the person affected. The Constitution does NOT really prohibit the imposition of regressive taxes. What it simply provides is that Congress shall evolve a progressive system of taxation. This is a mere directive upon Congress, not a justiciable right or a legally enforceable one. We cannot avoid regressive taxes but only minimize them.4. non-impairment of contracts clauseSECTION 10.No law impairing the obligation of contracts shall be passed.

This applies only when the government (taxing authority) itself is a party to the contract. Unilateral tax exemption may be withdrawn unilaterally.

There is impairment if the new law makes it more burdensome for the other party to perform his part of the contract.Example: ERAP bonds/peace bonds. The withdrawal of contractual tax exemptions thereof would amount to impairment because the impelling reason why they invested is the tax exemption

5. Exemption of religious, educational and charitable institutions

Sec. 28 (3), Art. VI.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.

Exemption from taxation of cemeteries, churches, parsonages or convents appurtenant thereto, as well as lands, buildings and improvements used exclusively for religious, charitable and educational purposes.

Real property taxes only

Standard applied by the constitution is USE of property, not OWNERSHIP

Kind of use: It should be actually, directly and exclusively used

Abra Valley College v. Aquino (1988): The term exclusively used does not necessarily mean total or absolute use. Even if the property is used for incidental purposes, the tax exemption will apply. Herrera v. QC BOAA: exclusively means primarily, not solely; property used as canteen and dormitory still exempt from real property taxes as long as they cater exclusively to the students of the school and not to the public. Non-stock, non-profit educational institutions now enjoy omnibus exemption or exemption from all taxes (Sec. 4, par. 3, Article XIV) as long as: (1) property being exclusively used for educational purposes, and (2) no part of income inures to private persons. Lung Center v. QC (2004): Portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are NOT tax exempt. The portions of the land occupied by the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. What determines exemption is the use; not ownership.6. Exemption of non-stock, non-profit educational institutions

(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 corporate existence of such institutions, their assets shall 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 reinvestment.

Omnibus exemption only for non-stock, non-profit educational institutions;

If it is a proprietary educational institution exemption is on real property taxes only and it must satisfy the requirements for exemption, i.e., actually, directly and exclusively used for educational purposes; as regards its revenues, the proprietary educational institution is not exempt but it is subject to preferential treatment, i.e., 10% tax rate if more than 50% of its income is derived from educational purposes (pre-dominance test); if more than 50% of its income is from other purposes, the regular tax rate for corporation applies, i.e., 35%. This provision applies to revenues and assets of educational institutions only. No similar exemption regarding the revenues of religious and charitable institutions.

vs. Art. VI, Sec. 28(3) on religious, educational and charitable institutions which covers property tax only Private inurement doctrine. No private individual must benefit from the income of these institutions. But some institutions circumvent the law to avail the exemption. >>> disguised dividends salary kuno but in reality a distribution of dividends to stockholders. Proprietary educational institution:

Real property exempt as long as being used for educational purposes

Income (revenue) 10% or 35%, applying the pre-dominance test7. Origination rule (initiation bill) must originate exclusively from the HOR, and the senate may propose or concur with amendments.SECTION 24.All appropriation, revenue or tariff bills, bills authorizing increase of 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.

Taxation must be by proper representation. No taxation without proper representation.8. Tax exemption statute- majority vote of ALL Congress (both houses)(4)No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.

9. Requirement of appropriations law before tax money could be spentSECTION 29.(1) No money shall be paid out of the Treasury except in pursuance of an appropriation made by law.

(2)No public money or property shall be appropriated, applied, paid, or employed, directly 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 government orphanage or leprosarium.

(3)All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the 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.

Fernandez v. Mun. of SMB: Public funds (taxes) can not be spent for paying the obligations of the government without an appropriation law/ordinance duly enacted. This is the rationale for non-availability of set-off or legal compensation between taxes and debts more pronounced. P v. Manalili: A BIR cashier is not allowed to deposit tax payments to a BIR account maintained to meet the operational expenses of the agency because to do so will violate the constitutional requirement.

10. Non-imprisonment for non-payment of poll tax

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

While a person may not be imprisoned for non-payment of poll tax, he may be imprisoned for non-payment of other taxes.

Poll tax/capitation/community taxes. Based upon the residence of the taxpayer, regardless of the source of income or location of the property of a tax payer.

If a tax is payable under a community tax certificate, the tax is not necessarily a personal tax. The personal tax therein is only the basic community tax of P5, for which a person, under the Constitution cannot be imprisoned for nonpayment thereof. The community tax certificate

11. Veto power of the PresidentThe President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object.

The item or items in vetoed shall be returned to the Lower house of Congress with the objections of the President. If after a reconsideration, 2/3 of ALL the members of such House shall agree to pass the bill, it shall be sent, together with the objection, to the other house by which it shall likewise be reconsidered, and if approved by 2/3 of ALL the members of the House, it shall become a law.12. Presidents power to taxThe Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.

REQUIREMENTS:

a. Enabling law

b. Law must provide for limitations and restrictions; and

c. Must be within the framework of national development

13. Taxation and Freedom of the press

SECTION 4.No law shall be passed abridging the freedom of speech, of expression, or of the press

However, like others, the media organization must pay equitable and non-discriminatory taxes on its business.17. EXEMPTION FROM TAXATION Meaning: Grant of immunity, express or implied, to particular persons., corporations, or to persons or corporations of a particular class, from a tax upon a property, or an excise which persons and corporations generally within the same taxing district, are obliged to pay. Briefly, it is the privilege of not being imposed a financial burden to which others are subject. Privilege of not being imposed a financial burden to which others are subject. Power of legislature to grant exemption: Power to tax includes the power to exempt. In the exercise of its inherent power to tax, the state, through its legislature has the full power to exempt any person, corporation, class of property from taxation as its views of public policy and expediency may dictate. Interpretation of tax exemption grants: Strictly construed against the person, entity or property claiming the exemption. One claiming the exemption must justify such claim by clear and positive grant.

Nature of tax exemption privilege It is personal and cannot be assigned or transferred by the person to whom it is given without the consent of the state, given in clear and unmistakable terms.

Types of exemption.

a. Expressed expressly granted by lawb. Implied exemption by omission. (But 1997 NIRC on income tax provides, income from whatever source, including but not limited to so how can there be an exemption by omission when it comes to INCOME tax).c. Contractual the elements of a valid contract must be presentd. Unilateral granted at will

Significance of knowing whether contractual or unilateral: If UNILATERAL, it could be withdrawn at will (the power to exempt carries with it the power to withdraw at will); If CONTRACTUAL, cannot be withdrawn at will

Tax Amnesty. It is an immunity from all criminal and civil obligations arising from non-payment of taxes. It is general pardon given to all taxpayers. It applies only to past tax periods, hence retroactive application. Tax amnesty is retroactive in application. Tax exemption, on the other hand, is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or burden of which others are subjected. It is prospective in application.18. FORMS OF ESCAPE FROM TAXATION Shifting

Capitalization

Avoidance

Transformation

Evasion unlawful

Exemption (Discussed above)

a) Tax Evasion - deliberate adoption of ILLEGAL MEANS to defeat or lessen the payment of tax otherwise known as Tax Dodging and punishable by lawi. Examples: deliberate failure to report taxable income, deliberate padding of expensesii. CIR v. Estate of Benigno Toda (2004): Tax evasion connotes the integration of three factors: (Dont forget! Nagagamit ito sa hypothetical question/problems; baka din sa objective itanong)1. the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due;

2. An accompanying state of mind which is described as being evil, in bad faith, willfull, or deliberate and not merely accidental; and3. A course of action of failure of action which is UNLAWFUL.iii. Badges of Fraud (Reyes v. CIR) Baunin itong badges of fraud sa loob ng La Salle sa 2nd Sunday1. Deliberate over-claim of deductions

2. Deliberate under-declaration of income

3. Recurrence of both

b. Tax Avoidance use by the taxpayer of legally permissible methods in order to reduce tax liability; otherwise called Tax Minimization a. Examples: Withdrawal of the deposit of money in banks (interest of which is subject to 20% withholding tax) and investment of said idle funds in tax-free government securities to avoid payment of interest income, postponing sale of capital assets (other than realty and shares of stocks) until 12 months shall have elapsed from date of acquisition so as to reduce the taxable capital gain thereon by 50%.other than real and shares of stocks - because if what is involved is realty or shares of stocks, there is a presumed capital gains of 6%

c. Shifting - the process by which the tax burden is transferred from the statutory taxpayer (impact of taxation) to another (incident of taxation) without violating the law.

Impact of Taxation point on which tax is originally imposed.

Incidents of Taxation point on which the tax burden finally rests or settles down.

Ex. Value added tax. The seller is required by law to pay tax, but the burden is actually shifted or passed on to the buyer.

d. Capitalization - a mere increase in the value of the property is not income but merely an unrealized increase in capital. No income until after the actual sale or other disposition of the property in excess of its original cost.

Except: If by reason of appraisal, the cost basis of property increased and the resultant basis is used as the new tax base for purposes of computing the allowable depreciation expense, the net difference between the original cost basis and new basis is taxable under the economic benefit principle. (BIR Ruling No. 029, March 19, 1998)

e. Transformation - manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production, thereby turning out his units at a lower cost.

POWERS OF THE CIR (Study this portion)19. National Internal Revenue Taxes Administered by the BIRa. Income tax

b. Transfer Taxes (Estate and Donors)

c. Value Added Tax

d. Other Percentage Taxes

e. Excise Taxes (Specific and ad valorem on certain goods)

f. Documentary Stamp Taxes

g. Such other taxes as are or thereafter may be imposed and collected by the BIR

20. POWER OF THE CIR TO INTERPRET TAX LAWS AND TO DECIDE TAX CASESSEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

To interpret tax laws

Original and exclusive power of the CIR; done by issuing revenue regulations

Subject to review by Secretary of Finance (CIR SOF)

To decide tax case

CIR, subject to appeal to CTA (CIR CTA)21. POWER TO OBTAIN INFORMATION SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take Testimony of Persons. - In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be relevant or material to such inquiry;

(B) To obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned or -controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint ventures of consortia and registered partnerships, and their members;

(C) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; and

(E) To cause revenue officers and employees to make a canvass from time to time of any revenue district or region and inquire after and concerning all persons herein who may be liable to pay any internal revenue tax, and all persons owning or having the care, management or possession of any object with respect to which a tax is imposed.

The provisions of the foregoing paragraphs notwithstanding, nothing in this Section shall be construed as granting the Commissioner the authority to inquire into bank deposits other than as provided for in Section 6(F) of this Code. Under pain of contempt

22. POWER TO ASSESS TAXES

Right to amend return

Within 3 years from the date of filing BUT before service of audit notice

SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements for Tax Administration and Enforcement. -(A) Examination of Returns and Determination of Tax Due. - After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however; That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer.

The tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly authorized representative.

Any return, statement of declaration filed in any office authorized to receive the same shall not be withdrawn:

Provided, That within three (3) years from the date of such filing, the same may be modified, changed, or amended:

Provided, further, That no notice for audit or investigation of such return, statement or declaration has in the meantime been actually served upon the taxpayer.

Best evidence obtainable rule

(B) Failure to Submit Required Returns, Statements, Reports and other Documents. When

A report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or There is reason to believe that any such report is false, incomplete or erroneous ( the Commissioner shall assess the proper tax on the best evidence obtainable.

In case a person

fails to file a required return or other document at the time prescribed by law, or

willfully or otherwise files a false or fraudulent return or other document,

( the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes.

Inquiry into bank deposits

Two grounds:

1. Determine the gross estate of the decedent

2. Offer for compromise based on financial incapacity

6 (F) Authority of the Commissioner to inquire into Bank Deposit Accounts. - Notwithstanding any contrary provision of Republic Act No. 1405 and other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits of:

(1) a decedent to determine his gross estate; and

(2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204 (A) (2) of this Code by reason of financial incapacity to pay his tax liability.

In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer. Bank shall not allow withdrawal unless there is a certification that a tax thereon has been paid

EXCEPT: Even if without a certification that tax had been paid, withdrawal of not exceeding P20K allowed if there is a prior authority from the BIR

(C) Authority to Conduct Inventory-taking, surveillance and to Prescribe Presumptive Gross Sales and Receipts. If there is reason to believe that such person is not declaring his correct income, sales or receipts for internal revenue tax purposes, the Commissioner may, at any time during the taxable year, --

Order inventory-taking of goods of any taxpayer as a basis for determining his internal revenue tax liabilities, or Place the business operations of any person, natural or juridical, under observation or surveillance The findings may be used as the basis for assessing the taxes for the other months or quarters of the same or different taxable years and such assessment shall be deemed prima facie correct. The Commissioner, after taking into account the sales, receipts, income or other taxable base of other persons engaged in similar businesses under similar situations or circumstances or after considering other relevant information may prescribe a minimum amount of such gross receipts, sales and taxable base, and such amount so prescribed shall be prima facie correct for purposes of determining the internal revenue tax liabilities of such person

When it is found that a person has failed to issue receipts and invoices in violation of the requirements of Sections 113 and 237 of this Code, or When there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made or to be made in a return required to be filed under the provisions of this Code,

(D) Authority to Terminate Taxable Period. - When it shall come to the knowledge of the Commissioner that a taxpayer is

1) Retiring from business subject to tax, or 2) Intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property, or 3) Performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partly ineffective (unless such proceedings are begun immediately) The Commissioner shall declare the tax period of such taxpayer terminated at any time and shall send the taxpayer a notice of such decision, together with a request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, or such portion thereof as may be unpaid, and Said taxes shall be due and payable immediately and shall be subject to all the penalties hereafter prescribed, unless paid within the time fixed in the demand made by the Commissioner. (E) Authority of the Commissioner to Prescribe Real Property Values. - The Commissioner is hereby authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from the private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be, whichever is the higher of: (1) the fair market value as determined by the Commissioner, or (2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. (G) Authority to Accredit and Register Tax Agents. The Commissioner shall accredit and register, based on their professional competence, integrity and moral fitness, individuals and general professional partnerships and their representatives who prepare and file tax returns, statements, reports, protests, and other papers with or who appear before, the Bureau for taxpayers. Within one hundred twenty (120) days from January 1, 1998, the Commissioner shall create national and regional accreditation boards, the members of which shall serve for three (3) years, and shall designate from among the senior officials of the Bureau, one (1) chairman and two (2) members for each board, subject to such rules and regulations as the Secretary of Finance shall promulgate upon the recommendation of the Commissioner. Individuals and general professional partnerships and their representatives who are denied accreditation by the Commissioner and/or the national and regional accreditation boards may appeal such denial to the Secretary of Finance, who shall rule on the appeal within sixty (60) days from receipt of such appeal. Failure of the Secretary of Finance to rule on the Appeal within the prescribed period shall be deemed as approval of the application for accreditation of the appellant.

(H) Authority of the Commissioner to Prescribe Additional Procedural or Documentary Requirements. - The Commissioner may prescribe the manner of compliance with any documentary or procedural requirement in connection with the submission or preparation of financial statements accompanying the tax returns.

23. DELEGATION OF POWERS

SEC. 7. Authority of the Commissioner to Delegate Power. - The Commissioner may delegate the powers vested in him under the pertinent provisions of this Code to any or such subordinate officials with the rank equivalent to a division chief or higher, subject to such limitations and restrictions as may be imposed under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner:

Provided, however, That the following powers of the Commissioner shall not be delegated: (NON-DELEGABLE)

(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;

(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

(c) The power to compromise or abate, under Sec. 204 (A) and (B) of this Code, any tax liability: EXCEPT (to the exception) meaning the following powers are delegable:

The following may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, the heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members;

(Rank Division Chief) Assessments issued by the regional offices involving basic deficiency taxes of Five hundred thousand pesos (P500,000) or less, (if the assessment originates from the National Level, cant be compromised by a delegate irrespective of the amount) and Minor criminal violations, as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, discovered by regional and district officials, (d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.

Summary: General Rule: Commissioner may delegate his powers to his subordinates

Exception: The following powers may NOT be delegated1. The power to recommend the promulgation of rules and regulations by the Secretary of Finance;

2. The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

3. The power to compromise or abate, under Sec. 204 (A) and (B) of this Code, any tax liability:

Exceptions to the exceptions: The following may nonetheless be delegated even if they involve non-delegable powers provided the conditions for delegation to be valid are present.

Regional evaluation board may compromise the following:

Assessments issued by the regional offices involving basic deficiency taxes of Five hundred thousand pesos (P500,000) or less, (if the assessment originates from the National Level, cant be compromised by a delegate irrespective of the amount) and

Minor criminal violations, as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, discovered by regional and district officials,

Power of assessment and collection delegable, being administrative in character.

Rules: The tax law must designate which agency must collect taxes (BIR/Sec. of Finance). Circulars or regulations issued by the Secretary of Finance or CIR must be in accordance with the tax measures imposed by Congress.Purposes of Taxation

Raise Revenue

Regulation

Promotion of General Welfare

Encourage Economic Growth

Reduce Social Inequality

Protect Local Industries

Basic Characteristics of Tax

Enforced contributions

Collected for public purpose

Pecuniary in nature/character

Collected from all persons, property, privilege within its jurisdiction

Must be collected during regular intervals

Inherent Limitations

Taxes must be levied for public purpose.

Territoriality (Jurisdictional) - most important: SITUS

Non-delegability of the power

Exemption of Government to tax

International Comity

Due process clause

Equal protection clause

Uniformity

Progressive system of taxation

non-impairment of contracts clause

non-imprisonment for non-payment of poll tax

Origination rule (initiation bill)

Presidential veto

Presidential power to fix tariff rates

Freedom of religion

Freedom of the press

Exemption of religious, educational and charitable institutions

Exemption of non-stock, non-profit educational institutions

No public money or property used for a