GENERAL PRINCIPLES OF TAXATION A. Definition ‘Taxation is an enforced proportional contribution, imposed by the State by its sovereign capacity, to support the government. ‘Three elements of taxation: 1. It Is an enforced proportional contribution from persons and properties. It Is Imposed by the State by virtue of its sovereignty. It is levied for the support of the government. (PCGG v. Cojuangco, G.R. No. 147062, December 14, 2001) Moreover, a tax is a pecuniary burden {XYZ Corporation manufactures glass panels and s almost at the point of Insolvency. It has no more cash and allt has are unsold glass panels. {received an assessment from the BIR for deficiency income taxes. It wants to pay but due to lack of cash, it seeks permission to pay in kind with glass panels. Can it do so? (2013 Bar Exam) ‘Suggested answer: Of course not. Tax is generally a pecuniary burden. You can't pay with glass panels. ‘The power of taxation Is Inherent to the State (along with the Power of eminent domain and police power); hence, the right of the State to impose taxes exists apart from the Constitution. (© The State is free to select the subjects of taxation, and the Court has repeatedly held that inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. (Lutz v. Araneta, G.R. ‘No. L-7859, December 22, 1955) © As the State has the power to determine the subjects of taxation, It is also free to select those who will be exempt from taxation. (Gomez v. Palomar, G.R. No. L-23645, October 29, 1968)‘TAX MADE LESS TAXING: 'A REVIEWER WITH CODALS AND CASES. Lifeblood theory: Taxes are the lifeblood of the State, through ‘which the government and Its agencies continue to operate and with which the State effects its functions for the welfare of its constituents. (Commissioner of Internal Revenue [CIR] v. Court of Tax Appeals, G.R. No. 106611, July 21, 1994) © Taxes are what we pay for a civilized society. Without taxes, the State would be paralyzed. (CIR v. Algue, G.R. No. 1-28896, February 17, 1988) Hence, because of the lifeblood theory... © Injunction generally does not lie against the collection of taxes (CIR v. Cebu Portland Cement Company, G.R. No. L-29059, December 15, 1987); (© The State is not estopped from collecting taxes by the mistakes or errors of its agents (Philippine Guaranty Co., Inc. v. CIR, GR. No. L-22074, April 30, 1965); The no-estoppel rule is not absolute. Hence, when the taxpayer only raises the defense of prescription only on, ‘appeal and the State does not question the timeliness of the defense, the State can be bound by the acts of ite ‘agents. (China Bank v. CIR, G.R. No. 172509, February 4, 2015, where It also took the BIR more than 12 years. to collect the tax.) (© Laws exempting subjects from taxation are strictly construed against the taxpayer, However, even with the lifeblood theory, the power of taxation ‘must still be exercised reasonably and in accordance with the law and prescribed procedure. (CIR v. Algue, G.R. L-28896, February 17, 1988) (© Moreover, while the State has the power to make a reasonable classification for taxation purposes, it must not be prompted by a spirit of hostility, or at the very least discrimination that has no reasonable basis. (Reyes v. Almanzor, G.R. No. 1-49839-46, April 26, 1991) © The power of taxation is sometimes also called the power to destroy. Therefore, it should be exercised with caution to ‘minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the “hen that lays the golden egg.” (Philippine Health Care Providers, Inc. v. CIR, G.R. No. 167330, September 18, 2009) (GENERAL PRINCIPLES OF TAXATION 3 ‘+ Taxes are not political in nature and as such are continued in force during the period of enemy occupation. Such tax laws are deemed to be the laws of the occupied territory and nat of the ‘occupying enemy, + Hence, tax laiws were considered effective during the Japanese ‘occupation. (Hilado v. CIR, G.R. No. L-9408, October 31, 1956) Briefly explain the following doctrines: eblood doctrine; necessity theory; benefits received. principle; and, doctrine of symbiotic relationship. (2016 Bar Exam) ‘Suggested answer: The lifeblood doctrine states that taxes are the lifeblood of the state; without taxes, the government will not operate. The necessity theory states that the government cannot continue ‘operate without taxes to. pay for expenses; hence, it can compel its ‘izens t0 pay up. The benefts received principle states that taxes are what we pay fora civllzed society—we pay, the government protects. The symbiotic relationship doctrine states that taxpayers ‘and the ‘government have reciprocal obligations: the taxpayer to pay taxes and {the government to provide protection and benefits . Attributes of a Sound Taxation System ‘+ The attributes of a sound taxation system are: ©. Fiscal adequacy + The sources of revenue should be adequate to meet government expenditures and their variations. (Chavez ¥. Ongpin, G.R. No. 76778, June 6, 1990) © Administrative Feasibility + The tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. ‘+ However, even if the imposition is burdensome to the taxpayer, the tax imposition is not necessarily invalid unless some aspect of it Is shown to violate any law or the Constitution. (Diaz v. Secretary of Finance, G.R. No. 193007, July 19, 2011, where the VAT on toll way fees was questioned as burdensome) © Theoretical Justice + The tax system should be fair to the average taxpayer and based upon the ability to pay.‘TAX MADE LESS TAXING: ‘A REVIEWER WITH CODALS AND CASES ‘Explain the principles of @ sound tax system. (2015 Bar Exam) ‘Suagested ansver: A sound tax system is FAT. There are three principles ‘of a sound tax system. First ls fiscal adequacy, meaning the sources of revenue must be adequate to cover government expenditures. Second {administrative feasibility, meaning the system should at least be capable of being effectively administered. Third is theoretical justice; It ‘Should be fair and be based on a taxpayer’ ability to pay. D. Taxas Distinguished from Other Exactions It is important to differentiate taxes from other exactions, especially when it comes to problems and issues on double taxation, tax exemptions, and the jurisdiction of the Court of Tax Appeals. © Simply, if an exaction is not a tax, then the defense of a taxpayer, of double taxation will necessarily fall. © In the same manner, a tax-exempt individual or corporation is generally only exempt from paying taxes; hence, if the exaction is not a tax, then the individual or corporation must still pay the exaction. ‘As against license/regulatory fees TAX [__LICENSEFEE | [Source Taxing power Police power of the State Purpose. Ralse revenue Regulation [Object Persons, property and | Right to exercise & privilege privilege [As to the [No limit Only necessary to carry Jamount Jout regulation If generating 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 revenue is incidentally obtained does not make it'a tax. © For example, the Universal Charge imposed through the Electric Power Industry Reform Act (EPIRA) was held to be a regulatory fee as it was imposed to ensure the viability of the Philippines’ electric power industry. (Gerochi v. Department of Energy, G.R. No. 159796, July 17, 2007) © Fees for the construction of special projects such as cell sites were held as regulatory fees because the main purpose of the ordinance imposing such fees was to regulate certain construction activities like telecommunication towers and (GENERAL PRINCIPLES OF TAXATION 5 telephone lines. (Smart Communications v. Municipality of Malvar Batangas, G.R. No. 204429, February 18, 2014) ‘The power of taxation can be used as an implement of police power (Ze,, itcan also be used to regulate certain industries such as the sugar industry or power industry); however, 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. (Planters Products, Inc. v. Fertiphil Corporation, G.R. No. 166066, March 14, 2008) (© The Socialized Housing Tax (SHT) imposed by Quezon City Is an example of a tax that is used to implement the state's police power. (Ferrer v. City Mayor Bautista, G.R. No. 210551, June 30, 2015, where the SC upheld the validity of the SHT which it found'to serve the regulatory purpose of removing slum areas in QC) ‘To be considered a license fee, the imposition 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 fee imposed by a city on liquor vendors for the privilege of selling liquor ie a licanee fee. It is not a tax; hence, the liquor vendors cannot state that they are subject to double taxation. (Compania General de Tabacos de Filipinas v. City of Manila, G.R. No. L-16619, June 29, 1963) (© Building fees are not taxes or Impositions upon property, but regulatory fees imposed by a city for the activity of bullding co repairing a structure. Hence, a foundation which is exempt from taxes cannot claim that it is exempt from the payment Of building fees, as these are not taxes in the first place. (Angeles University Foundation v. City of Angeles, G.R. No. 189999, June 27, 2012) ‘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 (0 A charge of a fixed sum which bears no relation at all to the ‘cost of inspection and regulation may well be considered 2 tax. (Progressive Development Corporation v. Quezon City, GR. No. L-36081, April 24, 1989) (0 Hence, exacting a certain amount of money as employee's fees from aliens who have already been cleared for employment has no justification as a regulatory measure and is actually a tax under the guise of regulation. (Villegas v. Hui Chiong Tsai Po Ho, G.R. No. L-29646, November 10, 1978)6 ‘TAX MADE LESS TAXING: ‘A REVIEWER WITH CODALS AND CASES (© Fees imposed on a per liter basis on fuel entering the Clark Special Economic Zone were held to be regulatory fees because there was a reasonable relation between the high volume of fuel brought into the zone and the greater extent of supervision and inspection needed to monitor the fuel. (Chevron Philippines, Inc. v. Bases Conversion Development Authority, G.R. No. 173863, September 15, 2010) As against special assessments TAX ‘SPECIAL ASSESSMENT Imposed on —_ Persons, properties, | Only on land ete, Why imposed | Regardless Public improvement of public benefits the land and improvement Increases its value Purpose ‘Support of | Contribution to cost of government. public improvement When Imposed | Regular exaction | Exceptional as to time ‘and locality Basis Necessity Benefits obtained ‘+ Under the Local Government Code, local government units may impose a special levy on lands specially benefited by public works projects or improvements funded by the local government unit. + The purpose of special levies/assessments is to finance the improvement of particular properties, with the benefits of the improvement accruing or inuring to the owners thereof who, after all, pay the assessment. (Republic of the Philippines v. Bacolod- ‘Murcia Milling Co., G.R. No. L-19824, July 9, 1966) As against toll fees TAX TOLL FEES Imposed by _| State Private persons Purpose | Raise revenues | Reimbursement of costs and expenses incurred in the construction of toll ways, and to assure reasonable margin of income Basis State's sovereign | Attribute of ownership power (GENERAL PRINCIPLES OF TAXATION 7 Fees paid by the public to toll way operators for the use of toll ways are not taxes. These are exactions which end up as earnings of toll way operators, not the government. (Diaz v. Secretary of Finance, G.R. No. 193007, July 19, 2011) Ampact and Incidence of Taxation (Direct and Indirect Taxes) Impact of taxation: point where the tax is originally imposed fo the one on whom the tax is formally assessed (the statutory taxpayer in most cases) Incidence of taxation: point on whom the tax burden finally rests It Is essential to know where the impact of taxation lies because It generally determines: (© The proper party to claim a refund of erroneously imposed indirect taxes, and © Whether the indirect taxes can be passed on to an exempt buyer. Based on the possibility of shifting the incidence of taxation, taxes may be classified into direct and indirect toxes. (CIR v. PLDT, G.R. No. 140230, December 15, 2005) (© Direct taxes are those that are exacted from the very person who, itis intended or desired, should pay them. + They are impositions for which a taxpayer is directly liable ‘on the transaction or business he is engaged in. + Example: income tax, transfer taxes (estate tax and donor's tax), residence tax (cedula) © Indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. + Indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. + When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay It, to the purchaser as part of the price of goods sold or services rendered.a ‘TAX MADE LESS TAXING: [A REVIEWER WITH CODALS AND CASES + Hence, the tax-exempt status of a buyer will not affect the liability of a seller for the indirect tax as the seller is the taxpayer statutorily liable for the payment of the tax. + Example: VAT, percentage taxes F. Inherent Limitations on the Power of Taxation ‘+ While the power of taxation is inherent to a State, such power is still subject to limitations. If no limitations were imposed on the power, then the State would be dangerous, rampant in wielding such power. Let's begin with the inherent limitations on the power ‘of taxation. 1. Taxes must be exacted for a PUBLIC PURPOSE, ‘= Money raised by taxation can be expended only for public purposes and not for the advantage of private individuals. (Pascual v. Secretary of Public Works, G.R. No. L-10405, December 29, 11960) * Public purpose may legally exist even ifthe motive which impelled the legislature to impose the tax was to favor one industry over another. (Tio v. Videogram Regulatory Board, G.R. No. 75697, June 19, 1907, where the favored industry was the video industry) 2. The power to tax is INHERENTLY LEGISTLATIVE in nature. + General rule: The power to tax Is purely legislative and cannot be delegated to other branches of the government. (Pepsi-Cola Bottling Company v. Municipality of Tanauan, G.R. No. L-31156, February 27, 1976) 0 EXCEPT: + Delegation to local governments (as local governments are granted the autonomous authority to create thelr own ‘sources of revenue and levy taxes) + Delegation to the President (such as the grant to the President to impose tariff rates within the bounds ‘sanctioned by the Customs and Tariffs Modernization Act) + Delegation to administrative authorities (such as the authority to fix rates within limits specified by the law) 3. GOVERNMENT entities, agencies, and instrumentalities are -generally exempt from taxation. + There is no point in national and local government taxing each ‘other, unless a sound and compelling policy requires such transfer Cf public funds from one government pocket to another. ‘GENERAL. PRINCIPLES OF TAXATION 9 © Note, however, that while government instrumentalites are exempt from real property taxes, government-owned or controlled corporations are not exempt from real property taxes. (Manila Intemational Airport Authority v. City of Parafiaque, G.R. No. 15560, July 20, 2006, where the MIAA was considered a government instrumentality and. thus ‘exempt from the payment of real property taxes imposed by Parafiaque) INTERNATIONAL COMITY ‘Tax treaties are entered Into to minimize the harshness of international double taxation. (© Laws and issuances must ensure that the reliefs granted Under tax treaties are accorded to the parties entitied thereto. ‘The obligation to comply with a tax treaty must take precedence over an administrative issuance. An administrative Issuance such {as a Revenue Memorandum Order should not operate to divest entitlement to a relief granted by a tax treaty. (© The denial of a relief based on a tax treaty due to the failure of a taxpayer to comply with a RMO would impair the value of the tax treaty and the State's duty to comply in good faith with the tax treaty. (Deutsche Bank AG Manila v. CIR, G.R. No. 188550, August 19, 2013, where the SC held that the ‘non-compliance of the taxpayer of a period prescribed by the RMO should not divest it of its relief based on the RP-Germany ‘Tax Treaty; reiterated in CBK Power Company Limited v. CIR, G.R. No. 193383, January 14, 2015) However, tax exemptions based on international agreements are still subject to the rule, “laws granting tax exemption are construed strictissimi juris’ against the taxpayer.” (Sea-Land Services, Inc. v. Court of Appeals, G.R. No. 122605, April 30, 2001, where the Court held that the transport of household goods of US military personnel was not included in the tax exemptions granted by the RP-US Military Bases Agreement) ‘An Exchange of Notes Is considered an executive agreement binding on states. Hence, an Exchange of Notes between the Philippines and Japan which states that the Philippine Government will assume taxes initially to be paid by Japanese firms should be respected. (Mitsubishi Corporation-Manila Branch v. CIR, G.R. No. 175772, June 5, 2017) ‘Taxes are limited to the State's TERRITORIAL JURISDICTION ‘The power to tax is limited to the territorial jurisdiction of the State.10 ‘TAX MADE LESS TAXING: ‘A REVIEWER WITH CODALS AND CASES © EXCEPT where privity of relationship exists between the State and the taxpayer. In these cases, the State can exercise its taxing powers over the taxpayer even outside its territory (Such as the taxation of resident citizens for income from sources worldwide). As the State can exercise its power to tax within its territorial jurisdiction, it can tax sales within foreign military zones as these military zones are not considered foreign territory. (Reagan v. CIR, G.R. No. L-26379, December 27, 1969) The State can tax a transaction if substantial elements of the contract are situated in the Philippines. (Manila Electric Company v. Yatco, G.R. No. 45697, November 1, 1939) In CIR v. Marubeni (G.R. No. 137377, December 18, 2001), Involved were turnkey contracts relating to the installation of 2 wharf complex and an ammonia storage complex in Leyte. Marubeni Corporation was a resident foreign corporation. The Supreme Court held that the turnkey contracts were actually divisible contracts which each had different stages, with each stage having a different tax implication, © For the stages involving the design, engineering, and Procurement of equipment and supplies, these were all considered outside the hands ofthe Philippine taxing authority as these were all done in Japan, © For the stages involving the actual installation and Construction, these were all considered within the jurisdiction of the Philippine taxing authority as the construction and installation of works were done within the Philippines, ©The implication here is that if you can argue that the contract is divisible, you can also argue that some stages of the Contract were not sourced here in the Philippines, and thus beyond the taxing jurisdiction of the Philippines. © This would be huge, considering that if the contract were considered indivisible, then everything would be considered situated here in the Philippines and thus the whole contract would be fully taxed. Jennifer's the only daughter of Janina who was a resident in Los Angeles, California, U.S.A. Janina died in the U.S. leaving to Jennifer one milion ~shares of Sun Life (Philippines), Inc., a corporation organized and existing under the laws of the Republic of the Philppines. Said shares tere held in trust for Janina by the Corporate Secretary of Sun Life ‘and the latter can vote the shares and receive dividends for Janina. (GENERAL PRINCIPLES OF TAXATION n The Internal Revenue Service (IRS) ofthe U.S. taxed the shares on the {ground that Janina was domiciled in the U.S. at the time of her death 2) Can the CIR of the Philppines also tax the same shares? Explain, 1b) Explain the concept of double taxation. (2016 Bar Exam) ‘Suggested answer: 2) Yes, the CIR can also tax the shares. Generally, the state has the ‘power to tax subjects within ts territorial jurisdiction. An example of 1s ‘power is how the Tax Code states that a decedent's gross estate subject to estate tax includes properties located in the Phillppines, whether the ‘decedent is a citizen, a resident alien, or a non-resident alien Properties In the Philippines include shares in corporations organized here, Such as ‘Sun Life (Philippines), Inc. Hence, the CIR can tax these shares. 1) There are tivo kinds of double taxation. The frst fs double taxation inte broad snse 7 Indect double taxon, th cars when 9 ‘ecuniary burden s imposed on the same subject matter by two diferent taxing authorities. The problem above ls an example of Indirect double taxation, a8 the tox Is imposed by two ifferent taxing authors (the US and the Phiippines). The second fs double taxation in the strc sense or direct double taxation? this occurs when the same property fe taved twice by the ‘Same toxng authority forthe some purpase within the same jurisdiction dhring the same taxing perio, with the two taxes of the same Kind of ‘character Tiss prohibted. G. Constitutional Limitations on the Power of Taxation ‘+The State’s power of taxation is also limited by the Constitution. Let's go through the limitations one by one. 1. Due Process ‘Article 112, Section 2. No person shall be deprived of tie, liberty, or property without due process of law, nor shall any person be denied the equal protection of the las. + Tax laws and their enforcement must comply with substantive ‘and procedural due process. (0° Substantive: the law must be reasonable and must be for a public purpose (© Procedural: there must be no arbitrariness in the assessment and collection; the prescribed rules must be followed before assessment and collection2 TAX MADE LESS TAXIN¢ ‘A REVIEWER WITH CODALS AND CASES 2. Equal Protection of Laws ‘= There is valid discrimination when the classificatior (© Rests on substantial distinctions; (© Is germane to the purpose of the law; © Not limited to existing conditions only; and (© Applies equally to all members of the same class. ‘+ Equal protection guarantee does not require territorial uniformity of laws. As long as there are actual and material differences between territories, there is no violation of the constitutional clause. (Tu v. Court of Appeals, G.R. No. 127410, January 20, 1999, where the Court said that there are substantial aifferences between businesses located within a fenced-in area of special economic zone and those located without) ‘+Tax exemptions have never violated the equal protection clause, as the Legislature has the Inherent power not only to select the subjects of taxation but to grant exemptions. (CIR v. Lingayen Gulf Electric Power Co., Inc., G.R. No. L-23771, August 4, 1988) ‘The municipality of San Isidro passed an ordinance imposing a t@x on Installation managers. At that time, there was only one installation ‘manager in the municipality; thus, only he would be lable for the tax. 1s this constitutional? (2013 Bar Exam) Suggested answer: Clearly not. The ordinance violates the equal protection clause and clearly discriminates against the instalation ‘manager. 3. Religious Freedom ‘Article THT, Section 5. No lew shall be made respecting an establishment of religion, or prohibiting the free exercise thereof The free exercise and enjoyment of religious profession and worship, without. discrimination or preterence, shal forever be allowed. NO Foligious test shall be required for the exercise of civil or political rights. ‘+ The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. ~ 0 Any restraints of such right can only be justified like other restraints of freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has the right to prevent. i (GENERAL PRINCIPLES OF TAXATION 13 © Hence, a tax imposed on the distribution and sale of bibles ‘and other religious literature Is invalid. (American Bible Society v. City of Manila, G.R. No. L-9637, April 30, 1957) Note, however, that under Section 30, NIRC, income of religious ‘organizations from activities conducted for’ profit or from any of their property (regardless of disposition of such income) is subject to income tax. Non-impairment of Contracts Article II, Section 10, No law impairing the obligation of contracts ‘shall be passed. ‘The tax exemptions protected by the non-impairment clause are contractual tax exemptions, not those granted by franchises or licenses. 0 A license conferring a tax exemption can be revoked at any time since it does not confer an absolute right, even if these were granted as inducements to invest in the country. (Republic v. Caguloa, G.R. No. 168584, October 15, 2007) © A franchise Is likewise subject to amendment, alteration, ‘oF repeal by Congress when the public interest So requires; hence, any exemption based on a franchise is not protected by the non-impairment clause. (Cagayan Electric Power and Light Co., Inc. v. CIR, G.R. No. L-60126, September 25, 1985) Contractual tax exemptions are: (© Those entered into by the taxing authority, © Lawfully entered into them under enabling laws, © Wherein the government acts in its private capacity and sheds its cloak of authority and immunity. (Manila Electric Co. v. Province of Laguna, G.R. No. 131359, May 5, 1999) Examples of contractual tax exemptions which are protected by the non-impairment clause: ©” Government bonds or debentures (© Perfected mining concession granted by the Spanish Government (Casanovas v. Hord, G.R. No. 3473, March 22, 1907)ry 5. TAX MADE LESS TAXING: ‘A REVIEWER WITH CODALS AND CASES Prohibition against Imprisonment for Non-payment of Poll Tax Article 1, Section 20. No person shall be imprisoned for debt or non-payment of a pol tax. In the Philippines, poll tax refers to the cedula or residence tax. © The Constitutional protection only applies to poll taxes; hence, people can still be imprisoned for non-payment of other kinds of taxes where the law so expressly provides (like for tax evasion cases). Uniformity and Equality of Taxation and Progressive System of Taxation Article V1, Section 28. (1) The rule of taxation shal be uniform and equitable. The Congress shall evolve a progressive system of taxation, Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. (City of Baguio v. de Leon, G.R. No. L-24756, October 31, 1968) © Uniformity does not call for perfect uniformity or perfect equality; reasonable classifications do not violate the Uniformity and equality of taxation. (Sison v. Ancheta, G.R. No. L-59431, July 25, 1984) (© The Constitution is also not violated when a certain tax is not imposed in other jurisdictions, for the Constitution does not require that taxes for the same purpose should be imposed in different territorial subdivisions at the same time. (Villanueva ¥. Gity of Iloilo, G.R. No. L-26521, December 28, 1968) © Congress is free to determine the subjects of taxation; hence, the tax is stil valid when some classes are subject to tax while some are not subject to tax. (Eastern Theatrical v. Alfonso, GR. L-1104, May 31, 1949) + However, the classification must still be valid and reasonable, according to the rules on equal protection. Ifthe classification is unreasonable, then the rule on uniformity will be violated. (Pepsi-Cola Bottling v. City of Butuan, G.R. No, L-22814, August 28, 1968) + ABIR issuance which unwittingly imposes different tax rates to the same class of products violates the rule on uniformity. | (GENERAL PRINCIPLES OF TAXATION 15 (CIR v. Fortune Tobacco Corporation, G.R. No. 180006, ‘September 28, 2011) Note: a classification freeze provision which imposes a different tax base depending on the date of introduction of a product in the market has been held to be valid because It simplified tax administration and eliminated potential abuse and corruption in tax collection. (British American Tobacco v. Camacho, G.R. No. 163583, April 15, 2009) ‘Taxation is progressive when its rate goes up depending on the resources of the person affected. © VAT Is admittedly regressive, because it is imposed on persons regardless of income, However, it is stil valid as the Constitution's mandate Is simply to evolve a progressive system of taxation. In any case, the VAT system minimizes the regressive effects by providing zero-rated transactions. (Abakada Guro Party List v. Ermita, G.R. No. 168056, ‘September 1, 2005) Delegated Authority to the President to Impose Tariff Rates Article VI, Section 28. (2) The Congress may, by law, authorize the President to fix within specified limits, and subject to such imitations ‘and restrictions as It may impose, tariff rates, Import and export ‘quotas, tonnage and wharfage dues, and other duties or imposts ‘within the tramework of the national development program of the Government. Prohibition against Taxation of Real Property of Charitable Institutions, Churches, Parsonages or Convents, Mosques and Non-profit Cemeteries Article VI, Section 28. (3) Charitable institutions, churches and Dparsonages or convents appurtenant thereto, mosques, non-profit emeteries, and all lands, bulldings, and improvements, actually, directly, and exclusively used for religious, chartable, or educational purposes shall be exempt from taxation. ‘The exemption only applies to real property tax. (Lladoc v. CIR, G.R. No. L-19201, June 16, 1965) “Actual, direct and exclusive use of the property” is the direct and immediate and actual application of the property itself to the purposes for which the institution is organized. (Lung Center v. ‘Quezon City, G.R. No. 144104, June 29, 2004)16 TAX MADE LESS TAXING: ‘A REVIEWER WITH CODALS AND CASES © “Exclusive” Is defined as possessed and enjoyed to the ‘exclusion of others; debarred from participation or enjoyment; and “exclusively” Is defined "in a manner to exclude; as ‘enjoying a privilege exclusively.” If real property is used for ‘one or more commercial purposes, It is not exclusively used for the exempted purposes but is subject to taxation. (Lung Center v. Quezon City, G.R. No. 144104, June 29, 2004) (© It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes; itis the actual use of the property. + Hence, when portions of a hospital and portions of the land are leased to private entities, those portions are ‘no longer exempt from real property taxes as the actual use of the property is no longer for charitable purposes. (Lung Center v. Quezon City, G.R. No. 144104, June 29, 2004) Before the 1973 and 1987 Constitutions, the phrase did not include “actual” and “direct”; the mere qualification was for “exclusive” use. Hence, cases stated that the exemption extends to facilities which are incidental to and reaconably necessary for the accomplishment of said purposes. (Herrera v. Quezon City Board of Assessment Appeals, G.R. No. L-15270, September 30, 1961) © Hence, a hospital, a school devoted to the hospital, and garage necessary for the school were considered exempt from real property tax. (Herrera v. Quezon City Board of Assessment ‘Appeals, G.R. No. L-15270, September 30, 1961) © A lodging house for people who participate in religious activities and a vegetable garden used by a priest, both of which were adjacent to a church were held to be incidental and necessary for religious purposes and were considered ‘exempt from real property tax. (Bishop of Nueva Segovia v. Provincial Board of llocos Norte, G.R. No. L-27588, December 31, 1927) (© The use by the Director of a school of a floor for residential purposes. was held as incidental to educational purposes. (Abra Valley College, Inc. v. Aquino, G.R. No. L-39086, June 15, 1988) + However, the lease of a floor of a school to a marketing company was not incidental to educational purposes and, thus, not exempt from real property tax. (Abra Valley College, Inc. v. Aquino, G.R. No. L-39086, June 15, 1988) (GENERAL PRINCIPLES OF TAXATION 7 + Note, however, that the Herrera, Nueva Segovia, and Abra cases were not decided under the more restrictive wording of the 1973 and 1987 Constitu- tions. Abra v. Hernando (G.R. No. .-49336, August 31, 1981) clarified that there must now be proof of ‘actual and direct use of the land, buildings, and im- provements for religious, charitable, or educational Purposes. This was reiterated by Justice Callejo in the Lung Center case. 9. Prohibition against Taxation of Non-stock, Non-profit Educational Institutions Article XIV, Section 4. (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 entited to such exemptions, subject to the limitations provided by law, Including restrictions on dividends and provisions for reinvestment. ‘The constitutional provision covers non-stock non-profit educa- tional institutions and exempts them from income tax, real property tax, donor's tax, and customs duties because the provision speaks of "all revenues and assets.” Revenues consist of the amounts eamed from the conduct of business operations. 0 Revenue is the component of the tax base in income tax, VAT, and local business tax. (CIR v. DLSU, G.R. No. 196596, November 8, 2016) Assets are tangible and intangible properties of the taxpayer, © The FMV of real property is the tax base for real property tax. (CIR v. DLSU) ‘The revenues and the assets must be used actually, directly, and exclusively for educational purposes. (© The test to determine exemption is the use of both the revenues and assets © Hence, when the revenues are actually, directly, and_exclu- sively used for educational purposes, the NSNP educational18 10. ‘TAX MADE LESS TAXING: ‘A REVIEWER WITH CODALS AND CASES institution shall be exempt from income tax, VAT, and local business tax. (CIR v. DLSU) ‘©. Andwhen the assets are actually, directly, and exclusively used for educational purposes, the NSNP educational institution shall be exempt from real property tax. (CIR v. DLSU, where the Court said that if a university leases a portion of a school building to a bookstore or canteen, the leased portion is no longer used for educational purposes and thus subject to real property tax, even if it caters to students. I don’t agree and would argue that a bookstore and canteen are reasonably covered under a schoo''s “educational purpose.") (© Income from cafeterias, canteens and bookstores are also exempt if they are owned and operated by the educational institution and are located within the school premises. (RMC 76-2003) Distinguish from tax treatment of: © Proprietary educational institutions (10% under Section 2718], NIRC) © Government educational institutions (Exempt under Section 30, NIRC) Majority Vote of Congress for Grants of Tax Exemptions GENERAL PRINCIPLES OF TAXATION 9 111, Prohibition on Use of Tax Levied for Special Purpose Article VI, Section 29. (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, any, shall be transferred to the general funds of the Government. 12. Tax. Bills Should Originate Exclusively in the House of Representatives Article V1, Section 24. All appropriation, revenue oF tari bil, ils authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments, 13. President's Veto Power on Appropriation, Revenue, and Tariff Bills “Article VE, Section 27, (2) The President shall have the power to ‘Veto any perticular item or items in an appropriation, revenue, oF tariff Bil, But the veto shall not affect the Item or Rems to which he does not object. Article VI, Section 28. (4) No law granting any tax exemption shall be passed without the concurrence of a majority ofall the Members ‘of the Congress, Hence, an exemption granted by a Presidential Proclamation and not by law is Invalid. John Hay Peoples Alternative Coalition v. Lim, G.R. No, 119775, October 24, 2003) This includes the grant of tax amnesties. © A tax amnesty, belng a general pardon or intentional ‘overlooking by the State ofits authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it, and in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing to reform a chance to do so and thereby become a part of the new society with a clean slate. (Republic v. Intermediate Appellate Court, G.R. No. L-69344, April 26, 1991) + The President has the power to “item-veto” when it comes to appropriation, revenue, or tariff bills. 14, Judicial Power to Review Legality of Tax Article VII, Section 5. The Supreme Court shall have the following Powers: (2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law oF the Rules of Court may provide, finat Judgments and orders of lower courts in: (b) All cases involving the legality of any tax, Impost, assessment, oF tol, oF any penalty imposed in relation thereto.20 ‘TAX MADE LESS TAXING: ‘A REVIEWER WITH CODALS AND CASES 15. Grant of Power to the Local Government Units to Create its Own Sources of Revenue Article X, Section 5. Each local government unit shall have the power {tp 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. ‘+ Note that the power of local government units is subject to limitations as Congress may provide, /-e., the Local Government Code. 1H. Double Taxation ‘+ There are two kinds of double taxation: © Direct double taxation, and © Indirect double taxation. ‘+ Itis direct double taxation which is prohibited. To constitute direct double taxation, Ure following requisites must be present: © The same property must be taxed twice; © Both taxes must be imposed: + Onthe same property or subject matter, + For the same purpose, + By the same State, Government, or taxing authority, + Within the same jurisdiction, + During the same taxing period, and + The two taxes are of the same kind or character (Villanueva v. City of Toile, G.R. No. L-26251, December, 28, 1968) + Imposition of a penalty and a tax on one taxpayer does not amount to double taxation. (Republic Bank v. Court of Tax Appeals, G.R. No. 62554, September 2, 1992) * Indirect double taxation simply means that there are two or more pecuniary impositions on a subject matter. It is not prohibited by the Constitution. i i { j (GENERAL PRINCIPLES OF TAXATION a Mr. Alas sells shoes in Makati through a retail store. He pays the VAT fn his grass sales to the BIR and the municipal license tax based on the same gross sales to the City of Makati. He comes to you for advice because he thinks he Is being subjected to double taxation. (2013 Bar Exam) ‘Suggested answer: Sorry, that's not prohibited double taxation, Mr. Alas. Best you pay, lest In court you'l spend your day. Double taxation {s allowed where ane tax is imposed by the national government and the ‘other By the local government. (Note: Rhyming answers are not given ‘extra credit In the Bar exam) Differentiate between double taxation in the strict sense and in a broad sense and give an example of each. (2015 Bar Exam) ‘Suggested answer: Double taxation in the strict sense is direct double taxation. Tt means that the same property or subject matter is taxed twice, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same tax period, with the two taxes of the same kind or character. An example would be taxing gross income twice In the same year. This is prohibited. Double taxation In the broad sense Is indirect double taxation. It means there are two or more pecuniary impositions on a subject matter. For example, @ business Is required to pay income tax to the National ‘government and local business tax to the local government. THis 1s ‘lowed. ‘Forms of Escape from Taxation ‘Tax avoidance and tax evasion are the common devices wherein the taxpayer can escape from the effects of taxation, Tax avoidance Is legal. It involves saving on taxes using legal means. (© Estate planning is a legal manner to minimize taxes. (Delpher Trades Corporation v. Intermediate Appellate Court, G.R. No. 1-69259, January 26, 1988) ‘Tax evasion Is illegal and can land you in jal. It involves the use Of forbidden and illegal devices to lessen and minimize tax. (© It connotes the integration of three factors: + The end to be achieved, i.¢., payment of less than that known by the taxpayer to be legally due, or the non- payment of tax when it is shown that a tax Is due, + State of mind which is “evil,” in “bad faith,” "willful," or “deliberate and not accidental,” and2 ‘TAX MADE LESS TAXING: [A REVIEWER WITH CODALS AND CASES. + Course of action or failure of action that is unlawful. (CIR v, Estate of Benigno Toda, G.R. No. 147188, September 14, 2004) Willful blindness doctrine: A taxpayer can no longer raise the defense that the errors on their tax returns are not their responsibility or that itis the fault of the accountants they hired. (0 Intent to defraud need not be shown for a conviction of tax evasion. ‘0 The only thing that needs to be proven Is that the taxpayer was aware of his obligation to file the tax return but he nevertheless voluntarily, knowingly, and intentionally failed to file the required returns. (People v. Kintanar, C.T.A. E.B. No, 006, December 3, 2010, affirmed by the Supreme Court in G.R. No. 196340) Prior to the VAT law, sales of cars were subject toa sales tax but the tax ‘applied only to the original or the frst sale; the second and subsequent Seles were not subject to tax. Deltold Motors, Inc. (Deltold) hit on the idea of setting up 2 wholly-owned subsidiary, Gonmad Motors, Inc. (Gonmad), and of selling Its assembled cars to. Gonmad at a iow price So It would pay 2 lower tax on the fist sale. Gonmad would then sell line cre t0 the public at 9 higher price without paying any cakes tax on this subsequent sale. Characterize the arrangement. (2013 Bar Exams) ‘Suggested answer: The plan is improper and similar to the case of Benigno Toda; the veil of corporate fiction can be pierced so that the ‘two transactions can be collapsed and taxed accordingly. You are the retained tax counsel of ABC Corp. Your client informed you that they have been directly approached with a proposal by a BIR insider (ie, a middle rank BIR official) on the tax matter they have referred fo you for handling. The BIR insider's proposal isto sette the matter by significantly reducing the assessment, but he will get 50% of the ‘savings arising from the reduced assessment. (2012 Bar Exem) What tax, criminal and ethical considerations will you take into account in giving your advice? Explain the relevance of each of these considerations. ‘Suggested answer: I wil advise my client not to accept the BIR insider's ‘proposal. Don't do it! Even ifthe assessment is significantly reduced, this will open my client to the isk of tax evasion and surcharges. There will be tax evasion as there is an intent to defraud the government Coupled with an act that reduces the tax lability. Moreover, as a lawyer, ‘am duty bound to uphold the law ~ to allow my client to go "under the table” wil be a terrible (yet sadly common) affront fo the Constitution and the laws that I swore to uphold and protect. ‘GENERAL PRINCIPLES OF TAXATION (On August 31, 2014, Haelton Corporation (HC), thru its authorized representative His. Pares, sold @ 16-storey commercial building known 2 Haeltown Building to Mr. Bely for P100 milion. Mr. Belly n turn, sold the same property on the same day to Bell Gates, Inc. (BGI) for P200 Ilion. These two (2) transactions were evidenced by two (2) separate Deeds of Absolut Sale notarized onthe Some day by the sae rotary public. Investigations by the Bureau of Internal Revenue (BIR) showed that: (A) the Deed of Absolute Sale between Mr. Belly and BGI was notarized ‘ahead of the sale between HC and Mr. Belly; (2) as early 2s May 17, 2014, HC received P40 milion from BGI, and not from Mr. Belly; (3) the said payment of P40 millon was recorded by BGI in its books as of June 50, 2014 as investment in Haeltown Building; and (4) the substantial portion of P40 milion was withdrawn by Ms. Pores through the declaration of cash dividends to al is stockholders. ‘Based on the foregoing, the BIR sent Haeltown Corporation a Notice of “Assessment for deficiency Income tax arising from an alleged simulated ‘sale ofthe aforesaid commercial bulldng to escape the higher corporate Income tax rate of thirty percent (30%). What isthe lability of Haeftown Corporation, if any? (2014 Bar Exam) ‘Suggested answer: Haeltown Corporation is lable for tax evasion and the pensity chall be Imposed on the company officer or employee responsible forthe violation. Tax evasion isthe use of ilegal means to fevade the payment of taxes. It involves the end to be achieved (less (axes), an "evil" state of mind, and the unlawful course of action. This ‘ase, similar to the scheme in the Benigno Toda case, has all three tlements of tax evasion. A scheme was employed to escape the higher corporate income tax rate, Lucky V Corporation (Lucky) owns @ 10-storey building on a 2,000 square meter lot in the City of Makati. It Sold the lot and building te Rainier for PBO milion. One month after, Rainier sold the lot and building to Healthy Smoke Company (HSC) for P200 millon. Lucky filed its annual tax return and declared is gain from the Sale ofthe lot and building in the amount of P750,000.00. An investigation conducted by the BIR revealed that two months prior to the sale of the properties to Rainier, Lucky received P40 milion from HSC and not from Rainier. Said amount of P40 milion was debited by HSC and reflected in Its trial balance as “other inv. - Lucky Bldg.” The ‘month after, another P40 milion was reflected in HSCs tia! balance as “other inv. — Lucky Bldg.” The BIR concluded that there's tax evasion Since the real buyer of the properties of Lucky is HSC and not Rainier. ‘tissued an assessment for deficiency Income tax in the amount of P79, milion against Lucky. Lucky argues that It resorted to tax avoidance oF 3 fax saving device, which Is allowed by the NIRC and BIR rules since it paid the correct taxes based on its sale to Rainier. On the other hand, Rainier and HSC also paid the prescribed taxes arising from the sale by 23