PALS Taxation REVIEWER 2014

1 COVERAGE LAW ON TAXATION 2014 BAR EXAMINATIONS I. General Principles of Taxation A. Definition and concept of taxation Taxation is the power by which the sovereign raises revenue to defray the necessary expenses of the government. It is merely a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. It includes, in its broadest and most general sense, every charge or burden imposed by the sovereign power upon persons, property, or property rights for the use and support of the government and to enable it to discharge its appropriate functions, and in that broad definition there is included a proportionate levy upon persons or property and all the various other methods and devices by which revenue is exacted from persons and property for public purposes. (51 Am. Jur 34-35) Taxation is described as a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. (Paseo Realty & Development Corporation v. Court of Appeals, GR No. 119286,

October 13, 2004)

B. Nature of taxation Taxation is inherent in nature, being an attribute of sovereignty. (Chamber of Real Estate and

Builders’ Association, Inc. v. Romulo, 614 SCRA 605 (2010))

As an incident of sovereignty, the power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. (Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667 (1996)) The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. (Pepsi-Cola Bottling Company of the Phil. V. Mun. of Tanauan, Leyte, 69 SCRA 460) The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representative of the people, and where the people have laid the power, there it must remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco

Corporation, 559 SCRA 160 (2008))

The power of taxation is essentially a legislative function. The power to tax includes the authority to: (1) determine the (a) nature (kind); (b) object (purpose); (c) extent (amount of rate); (d) coverage (subjects and objects); Bar Ops Pilipinas 2015 Philippine Association of Law Schools

2 (e) apportionment of the tax (general or limited application); (f) situs (place) of the imposition; and (g) method of collection; (2) grant tax exemptions or condonations; and (3) specify or provide for the administrative as well as judicial remedies that either the government or the taxpayer may avail themselves in the proper implementation of the tax measure. (Petron v. Pililla, GR No. 158881, April 16, 2008) In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed. (Chamber of Real Estate and Builders’ Association, Inc.

v. Romulo, 614 SCRA 605 (2010)) C. Characteristics of taxation

As a principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. (National Power Corporation v. City of Cabanatuan, GR No. 149110,

April 9, 2003)

The power to tax is so unlimited in force and so searching in extent, that 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. (Tio v. Videogram Regulatory Board et al., 151

SCRA 213)

It is a settled principle that the power of taxation by the state is plenary. Comprehensive and supreme, the principal check upon its abuse resting in the responsibility of the members of the legislature to their constituents. (PLANTERS PRODUCTS, INC. v. FERTIPHIL CORPORATION,

G.R. No. 166006, March 14, 2008)

Taxes being the lifeblood of the government that should be collected without unnecessary hindrance, every precaution must be taken not to unduly suppress it. (Republic v. Caguioa, 536

SCRA 193 (2007))

The power to tax is sometimes called the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of the taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kills the ‘hen that lays the golden egg.’

(Commissioner of Internal Revenue v. SM Prime Holdings, Inc., 613 SCRA 774 (2010))

In order to maintain the general public’s trust and confidence in the government, this power must be used justly and not treacherously. (Roxas y Cia v. Court of Tax Appeals, 23 SCRA 276) Tax laws are prospective in operation, unless the language of the statute clearly provides otherwise. (Commissioner of Internal Revenue v. Acosta, 529 SCRA 177 (2007))

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3 D. Power of taxation compared with other powers 1. Police power Police Power is the power to make, ordain and establish all manner of wholesome and reasonable laws, statutes and ordinances whether with penalties or without, not repugnant to the Constitution, the good and welfare of the commonwealth, and for the subjects of the same.

(Metropolitan Manila Development Authority v. Garin, GR No. 130230, April 15, 2005)

The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The "lawful subjects" and "lawful means" tests are used to determine the validity of a law enacted under the police power. The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations. (PLANTERS PRODUCTS, INC. v.

FERTIPHIL CORPORATION, G.R. No. 166006, March 14, 2008)

The motivation behind many taxation measures is the implementation of police power goals. Progressive income taxes alleviate the margin between rich and poor; the so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT

MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)

Taxation is distinguishable from police power as to the means employed to implement these public good goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects of taxation, and the belief that taxes are the lifeblood of the state yet at the same time, it has been recognized that taxation may be made the implement of the state’s police power. (SOUTHERN CROSS CEMENT CORPORATION

v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005) Unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise money to boost the government’s general funds but to provide means for the rehabilitation and stabilization of a threatened industry, the coconut industry, which is so affected with public interest as to be within the police power of the State. The subject laws are akin to the sugar liens imposed by Sec. 7(b) of P.D. 388, and the oil price stabilization funds under P.D. 1956, as amended by E.O. 137. (PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA

NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)

If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax. (GEROCHI v. DEPARTMENT OF ENERGY, 527 SCRA

696 (2007))

While it is true that the power of taxation can be used as an implement of police power, the primary purpose of the levy is revenue generation. 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. 166006,

March 14, 2008)

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4 It has been the settled law that municipal license fees could be classified into those imposed for regulating occupations or regular enterprises, for the regulation or restriction of non-useful occupations or enterprises and for revenue purposes only. Licenses for non-useful occupations are also incidental to the police power and the right to exact a fee may be implied from the power to license and regulate, but in fixing the amount of the license fees the municipal corporations are allowed a much wider discretion in this class of cases. (ERMITA-MALATE

HOTEL AND MOTEL OPERATORS ASSOCIATION, INC., HOTEL DEL MAR INC. and GO CHIU v. THE HONORABLE CITY MAYOR OF MANILA, G.R. No. L-24693, July 31, 1967) 2. Power of eminent domain Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use. (COMMISSIONER OF INTERNAL REVENUE v. CENTRAL

LUZON DRUG CORPORATION G.R. No. 159647 April 15, 2005)

Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain. Tax measures are but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose." In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. (COMMISSIONER OF INTERNAL REVENUE v. CENTRAL LUZON DRUG

CORPORATION G.R. No. 159647 April 15, 2005) E. Purpose of taxation 1. Revenue-raising 2. Non-revenue/special or regulatory

The Court was satisfied that the coco-levy funds were raised pursuant to law to support a proper governmental purpose. They were raised with the use of the police and taxing powers of the State for the benefit of the coconut industry and its farmers in general. (PAMBANSANG

KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)

In relation to the regulatory purpose of the imposed fees, “the imposition questioned must relate to an occupation or activity that so engages the public interest, morals, safety and development as to require regulation for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation, but also its incidental consequences as well.” (CHEVRON PHILIPPINES, INC. v. BASES CONVERSION DEVELOPMENT AUTHORITY,

630 SCRA 519 (2010))

As an elementary principle of law, license taxation must not be “so onerous to show a purpose to prohibit a business which is not injurious to health or morals.” (TERMINAL FACILITIES AND SERVICES CORPORATION v. PHILIPPINE PORTS AUTHORITY, 378 SCRA 82 (2002)) It is a police power measure. The objectives behind its enactment are: "(1) To be able to impose payment of the license fee for engaging in the business of massage clinic (2) in order to forestall possible immorality which might grow out of the construction of separate rooms for Bar Ops Pilipinas 2015 Philippine Association of Law Schools

5 massage of customers." (TOMAS VELASCO v. HON. ANTONIO J. VILLEGAS, G.R. No. L-24153,

February 14, 1983)

F. Principles of sound tax system 1. Fiscal adequacy Certainly, to continue collecting real property taxes based on valuations arrived at several years ago, in disregard of the increases in the value of real properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources of revenues must be adequate to meet government expenditures and their variations. (FRANCISCO I. CHAVEZ v. JAIME B.

ONGPIN, G.R. No. 76778, June 6, 1990) 2. Administrative feasibility 3. Theoretical justice G. Theory and basis of taxation 1. Lifeblood theory

As well said in a prior case, revenue laws are not intended to be liberally construed. Considering that taxes are the lifeblood of the government and in Holmes’s memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented. (COMMISSIONER

OF INTERNAL REVENUE v. ROSEMARIE ACOSTA G.R. No. 154068 August 3, 2007)

Taxes being the lifeblood of the government should be collected promptly. No court shall have the authority to grant an injunction to restrain the collection of any internal revenue tax, fee or charge imposed by the National Internal Revenue Code. (ANGELES CITY v. ANGELES ELECTRIC

COOPERATION, 622 SCRA 43 (2010))

We are not unaware of the doctrine that taxes are the lifeblood of the government, without which it can not properly perform its functions; and that appeal shall not suspend the collection of realty taxes. However, there is an exception to the foregoing rule, i.e., where the taxpayer has shown a clear and unmistakable right to refuse or to hold in abeyance the payment of taxes. (EMERLINDA S. TALENTO vs. HON. REMIGIO M. ESCALADA, JR., G.R. No. 180884, June

27, 2008)

2. Necessity theory The theory behind the exercise of the power to tax emanates from necessity, without taxes, government cannot fulfill its mandate of promoting the general welfare and well being of the people. (GEROCHI v. DEPARTMENT OF ENERGY, 527 SCRA 696 (2007)) 3. Benefits-protection theory (Symbiotic relationship) Despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the Bar Ops Pilipinas 2015 Philippine Association of Law Schools

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

(COMMISSIONER OF INTERNAL REVENUE v. ALGUE, INC., and THE COURT OF TAX APPEALS, G.R. No. L-28896, February 17, 1988)

The expenses of government, having for their object the interest of all, should be borne by everyone, and the more man enjoys the advantages of society, the more he ought to hold himself honored in contributing to those expenses. (ABAKADA GURO PARTY LIST (Formerly

AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S. ALBANO v. THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA, G.R. No. 168056, September 1, 2005) 4. Jurisdiction over subject and objects H. Doctrines in taxation 1. Prospectivity of tax laws

Note that the issue on the retroactivity of Section 204(c) of the 1997 NIRC arose because the last paragraph of Section 204(c) was not found in Section 230 of the old Code. After a thorough consideration of this matter, we find that we cannot give retroactive application to Section 204(c) abovecited. We have to stress that tax laws are prospective in operation, unless the language of the statute clearly provides otherwise. (COMMISSIONER OF INTERNAL REVENUE v.

ROSEMARIE ACOSTA G.R. No. 154068 August 3, 2007) 2. Imprescriptibility 3. Double taxation a) Strict sense

Double taxation means taxing the same property twice when it should be taxed only once; that is, "taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character. (COMMISSIONER OF INTERNAL

REVENUE v. SOLIDBANK CORPORATION G.R. No. 148191 November 25, 2003) b) Broad sense

Subjecting interest income to a 20% FWT and including it in the computation of the 5% GRT is clearly not double taxation: First, the taxes herein are imposed on two different subject matters; Second, although both taxes are national in scope because they are imposed by the same taxing authority -- the national government under the Tax Code -- and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different; Third, these two taxes are of different kinds or characters.

(COMMISSIONER OF INTERNAL REVENUE v. SOLIDBANK CORPORATION G.R. No. 148191 November 25, 2003)

Regulation and taxation are two different things, the first being an exercise of police power, whereas the latter involves the exercise of the power of taxation. While R.A. 2264 provides that no city may impose taxes on forest products and although lumber is a forest product, the tax in Bar Ops Pilipinas 2015 Philippine Association of Law Schools

7 question is imposed not on the lumber but upon its sale; thus, there is no double taxation and even if there was, it is not prohibited. (SERAFICA v. CITY TREASURER OF ORMOC, G.R. No. L-

24813, April 28, 1968)

Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article. This is not being in violation of the rule against double taxation. (COMPANIA

GENERAL DE TABACOS DE FILIPINAS v. CITY OF MANILA, 8 SCRA 367) c) Constitutionality of double taxation

Unlike the United States Constitution, double taxation is not specially prohibited in the Philippine Constitution. (Manufacturers Life v. Meer, 89 Phil 210) d) Modes of eliminating double taxation Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief- the exemption method and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer’s remaining income or capital. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. (COMMISSIONER OF INTERNAL REVENUE v. S.C. JOHNSON AND SON, INC. G.R. No.

127105 June 25, 1999)

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country. Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. (COMMISSIONER OF INTERNAL REVENUE v. S.C. JOHNSON

AND SON, INC. G.R. No. 127105 June 25, 1999)

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8 4. Escape from taxation a) Shifting of tax burden Section 135(a) should be construed as prohibiting the shifting of the burden of the excise tax to the international carriers who buy petroleum products from the local manufacturers. Said international carriers are thus allowed to purchase the petroleum products without the excise tax component which otherwise would have been added to the cost or price fixed by the local manufacturers or distributors/sellers. (COMMISSIONER OF INTERNAL REVENUE v. PILIPINAS

SHELL PETROLEUM CORPORATION, G.R. No. 188497, February 19, 2014) (i) Ways of shifting the tax burden

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is billed as tax to the purchaser. The method of listing the price and the tax separately and defining taxable gross receipts as the amount received less the amount of the tax added, merely avoids payment by the seller of a tax on the amount of the tax.

(PHILIPPINE ACETYLENE CO., INC. v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. L19707, August 17, 1967) (ii) Taxes that can be shifted (iii) Meaning of impact and incidence of taxation In indirect taxation, a distinction is made between the liability for the tax and burden of the tax: The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the seller's liability but merely the burden of the VAT. (RENATO V. DIAZ and AURORA MA. F. TIMBOL v. THE

SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011) b) Tax avoidance

Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. (COMMISSIONER OF INTERNAL

REVENUE v. THE ESTATE OF BENIGNO P. TODA, JR. G.R. No. 147188 September 14, 2004) c) Tax evasion

Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

(COMMISSIONER OF INTERNAL REVENUE v. THE ESTATE OF BENIGNO P. TODA, JR. G.R. No. 147188 September 14, 2004)

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the 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; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful. (COMMISSIONER OF INTERNAL REVENUE v. THE

ESTATE OF BENIGNO P. TODA, JR. G.R. No. 147188 September 14, 2004)

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9

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. (COMMISSIONER OF INTERNAL REVENUE v. THE ESTATE OF BENIGNO P. TODA, JR.

G.R. No. 147188 September 14, 2004)

5. Exemption from taxation a) Meaning of exemption from taxation It is the legislature, unless limited by a provision of the state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes. (JOHN HAY PEOPLES ALTERNATIVE COALITION, et al. v. VICTOR LIM, et al., G. R.

No. 119775, October 24, 2003) b) Nature of tax exemption

Taxation is the rule and exemption is the exception. (FELS ENERGY, INC. v. PROVINCE OF

BATANGAS, 516 SCRA 186 (2007))

Since the power to tax includes the power to exempt thereof which is essentially a legislative prerogative, it follows that a municipal mayor who is an executive officer may not unilaterally withdraw such an expression of a policy thru the enactment of a tax. (PHILIPPINE PETROLEUM

CORPORATION v. MUNICIPALITY OF PILILLA, G.R. No. 90776, June 3, 1991)

A tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products under Section 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are international carriers; nevertheless, the manufacturer, as the statutory taxpayer who is directly liable to pay the excise tax on its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum products sold to international carriers (COMMISSIONER OF

INTERNAL REVENUE v. PILIPINAS SHELL PETROLEUM CORPORATION, G.R. No. 188497, February 19, 2014) c) Kinds of tax exemption (i) Express (ii) Implied

It bears repeating that the law looks with disfavor on tax exemptions and he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted. (WESTERN MINOLCO CORPORATION v. COMMISSIONER OF INTERNAL

REVENUE, G.R. No. L-61632, August 16, 1983)

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10 (iii) Contractual Nevertheless, since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The only exception to this rule is where the exemption was granted to private parties based on material consideration of a mutual nature, which then becomes contractual and is thus covered by the non-impairment clause of the Constitution. (MCIAA v. Marcos, G.R. No. 120082 September 11, 1996) d) Rationale/grounds for exemption In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. Taxation assumes even greater significance with the ratification of the 1987 Constitution. (BATANGAS POWER CORPORATION v. BATANGAS CITY and NATIONAL POWER

CORPORATION, G.R. No. 152675, April 28, 2004)

The PPI says that the discriminatory treatment of the press is highlighted by the fact that transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716 but an enumeration of some of these transactions will suffice to show that by and large this is not so and that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions are granted, in some cases, to encourage agricultural production and, in other cases, for the personal benefit of the end-user rather than for profit. (ARTURO M. TOLENTINO

v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995) e) Revocation of tax exemption

Since the law granted the press a privilege, the law could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting exemptions, the State does not forever waive the exercise of its sovereign prerogative; indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other businesses have long ago been subject. (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and

THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

The rule is that a special and local statute applicable to a particular case is not repealed by a later statute which is general in its terms, provisions and application even if the terms of the general act are broad enough to include the cases in the special law unless there is manifest intent to repeal or alter the special law. (THE PROVINCE OF MISAMIS ORIENTAL, represented

by its PROVINCIAL TREASURER v. CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC., G.R. No. L-45355, January 12, 1990)

This Court recognized the removal of the blanket exclusion of government instrumentalities from local taxation as one of the most significant provisions of the 1991 LGC. Specifically, we stressed that Section 193 of the LGC, an express and general repeal of all statutes granting exemptions from local taxes, withdrew the sweeping tax privileges previously enjoyed by the NPC under its Charter. (BATANGAS POWER CORPORATION v. BATANGAS CITY and NATIONAL

POWER CORPORATION, G.R. No. 152675, April 28, 2004)

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11 Erroneous application and enforcement of the law by public officers do not preclude subsequent correct application of the statute, and the government is never estopped by the mistake or error on the part of its agents. (PHILIPPINE BASKETBALL ASSOCIATION v. COURT OF APPEALS, 337 SCRA 358) 6. Compensation and set-off Taxes cannot be the subject of set-off or compensation for the following reasons: (1) taxes are of distinct kind, essence and nature, and these impositions cannot be classed in the same category as ordinary obligations; (2) the applicable laws and principles governing each are peculiar, not necessarily common to each; and (3) public policy is better subscribed if the integrity and independence of taxes are maintained. (REPUBLIC v. MAMBULAO LUMBER

COMPANY, 4 SCRA 622 (1962))

Taxes cannot be subject to compensation for the simple reason that the Government and the taxpayers are not creditors and debtors of each other, debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. (SOUTH

AFRICAN AIRWAYS v. COMMISSIONER OF INTERNAL REVENUE, 612 SCRA 665 (2010))

However, if the obligation to pay taxes and the taxpayer’s claim against the government are both overdue, demandable, as well as fully liquidated, compensation takes place by operation of law and both obligations are extinguished to their concurrent amounts. (DOMINGO v.

GARLITOS, 8 SCRA 443 (1963)) 7. Compromise 8. Tax amnesty a) Definition

A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violating a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. (ASIA INTERNATIONAL AUCTIONEERS, INC. v.

COMMISSIONER OF INTERNAL REVENUE G.R. No. 179115 September 26, 2012)

A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. (ASIA INTERNATIONAL AUCTIONEERS, INC. v.

COMMISSIONER OF INTERNAL REVENUE G.R. No. 179115 September 26, 2012) b) Distinguished from tax exemption 9. Construction and interpretation of: a) Tax laws (i) General rule

Verily, taxation is a destructive power which interferes with the personal and property for the support of the government. Accordingly, tax statutes must be construed strictly against the

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12 government and liberally in favor of the taxpayer. (MCIAA v. Marcos, G.R. No. 120082

September 11, 1996)

The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him. Unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be presumed. This is because taxes are burdens on the taxpayer, and should not be unduly imposed or presumed beyond what the statutes expressly and clearly import. (COMMISSIONER OF INTERNAL REVENUE v. THE PHILIPPINE AMERICAN ACCIDENT

INSURANCE COMPANY, INC. G.R. No. 141658 March 18, 2005) (ii) Exception b) Tax exemption and exclusion (i) General rule

But since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed in strictissimi juris against the taxpayers and liberally in favor of the taxing authority. (MCIAA v. Marcos, G.R. No. 120082 September 11, 1996) Entrenched in our jurisprudence is the principle that tax refunds are in the nature of tax exemptions which are construed in strictissimi juris against the taxpayer and liberally in favor of the government. As tax refunds involve a return of revenue from the government, the claimant must show indubitably the specific provision of law from which her right arises; it cannot be allowed to exist upon a mere vague implication or inference nor can it be extended beyond the ordinary and reasonable intendment of the language actually used by the legislature in granting the refund. (COMMISSIONER OF INTERNAL REVENUE v. ROSEMARIE ACOSTA G.R. No. 154068

August 3, 2007)

Well-settled in this jurisdiction is the fact that actions for tax refund, as in this case, are in the nature of a claim for exemption and the law is construed in strictissimi juris against the taxpayer. The pieces of evidence presented entitling a taxpayer to an exemption are also strictissimi scrutinized and must be duly proven. (KEPCO PHILIPPINES CORPORATION v.

COMMISSIONER OF INTERNAL REVENUE G.R. No. 179961 January 31, 2011)

The legislative intent, as shown by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR from exemption from the payment of corporate income tax. It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius. (PHILIPPINE

AMUSEMENT AND GAMING CORPORATION (PAGCOR) v. THE BUREAU OF INTERNAL REVENUE G.R. No. 172087 March 15, 2011)

It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius. Not being a local water district, a cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital or educational institution, petitioner clearly does not belong to the exception and it is therefore incumbent upon it to point to some provisions of the Bar Ops Pilipinas 2015 Philippine Association of Law Schools

13 LGC that expressly grant its exemption from local taxes. (NATIONAL POWER CORPORATION v.

CITY OF CABANATUAN G.R. No. 149110 April 9, 2003)

Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution of much needed funds. While international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. (COMMISSIONER OF INTERNAL REVENUE v. MITSUBISHI METAL CORPORATION G.R. No. L-54908 January 22, 1990) The claimed statutory exemption of the John Hay SEZ from taxation should be manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be mistaken. If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227. (JOHN HAY PEOPLES ALTERNATIVE

COALITION, et al. v. VICTOR LIM, et al., G. R. No. 119775, October 24, 2003)

The Court in PLDT v. City of Davao, held that in approving Section 23 of RA No. 7925, Congress did not intend it to operate as a blanket tax exemption to all telecommunications entities. The Court also clarified the meaning of the word "exemption" in Section 23 of RA 7925: that the word "exemption" as used in the statute refers or pertains merely to an exemption from regulatory or reporting requirements of the Department of Transportation and Communication or the National Transmission Corporation and not to an exemption from the grantee’s tax liability. (SMART COMMUNICATIONS, INC. v.THE CITY OF DAVAO, G.R. No. 155491, July 21,

2009)

In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna, the issue that the Court had to resolve was whether PLDT was liable to pay franchise tax to the Province of Laguna in view of the "in lieu of all taxes" clause in its franchise and Section 23 of RA 7925. Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts are resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxing powers, the Court held that Section 23 of RA 7925 could not be considered as having amended petitioner's franchise so as to entitle it to exemption from the imposition of local franchise taxes. (SMART COMMUNICATIONS, INC. v.THE CITY OF DAVAO, G.R. No. 155491,

July 21, 2009)

The "in lieu of all taxes" clause in a legislative franchise should categorically state that the exemption applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed against the taxpayer and liberally in favor of the taxing authority. (SMART

COMMUNICATIONS, INC. v.THE CITY OF DAVAO, G.R. No. 155491, July 21, 2009)

PLDT’s contention that the “in-lieu-of-all-taxes” clause does not refer to “tax exemption” but to “tax exclusion” and hence, the strictissimi juris rule does not apply. The Supreme Court explains that these two terms actually mean the same thing, such that the rule that tax exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax exclusions (PHILIPPINE LONG DISTANCE TELEPHONE

COMPANY vs PROVINCE OF LAGUNA G.R. No. 151899, August 16, 2005)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

14

(ii) Exception However, if the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government in the course of its operations. (MCIAA v. Marcos, G.R. No. 120082, September 11, 1996) There is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute. Obviously, that is not the situation here since Fortune Tobacco’s claim for refund is premised on its erroneous payment of the tax, or better still, the government’s exaction in the absence of a law. (COMMISSIONER OF INTERNAL

REVENUE v. FORTUNE TOBACCO CORPORATION, G.R. Nos. 167274-75, July 21, 2008)

A claim for tax refund may be based on statutes granting tax exemption or tax refund and in such case, the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and categorical language. Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts abhorring a person’s unjust enrichment at the expense of another.

(COMMISSIONER OF INTERNAL REVENUE v. FORTUNE TOBACCO CORPORATION, G.R. Nos. 167274-75, July 21, 2008)

As a necessary corollary, when the taxpayer’s entitlement to a refund stands undisputed, the State should not misuse technicalities and legalisms, however exalted, to keep money not belonging to it. The government is not exempt from the application of solutio indebiti, a basic postulate proscribing one, including the State, from enriching himself or herself at the expense of another. (COMMISSIONER OF INTERNAL REVENUE v. FORTUNE TOBACCO CORPORATION,

G.R. Nos. 167274-75, September 11, 2013) c) Tax rules and regulations (i) General rule only

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend or expand the statute beyond its terms, or in any way modify explicit provisions of the law. Hence, in case of discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails. (FORT BONIFACIO DEVELOPMENT

CORPORATION v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, September 4, 2012) Revenue Memorandum Circulars (RMCs) must not override, supplant, or modify the law, but must remain consistent and in harmony with the law they seek to apply and implement.

(COMMISSIONER OF INTERNAL REVENUE v. SM PRIME HOLDINGS, INC. 613 SCRA 774 (2010))

Admittedly the government is not estopped from collecting taxes legally due because of mistakes or errors of its agents. But like other principles of law, this admits of exceptions in the Bar Ops Pilipinas 2015 Philippine Association of Law Schools

15 interest of justice and fair play, as where injustice will result to the taxpayer. (COMMISSIONER

OF INTERNAL REVENUE v. COURT OF APPEALS, G.R. No. 117982, February 6, 1997)

"When a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged with its enforcement and the [l]egislature thereafter [reenacts] the provisions [without] substantial change, such action is to some extent confirmatory that the ruling carries out the legislative purpose." (COMMISSIONER OF INTERNAL REVENUE v. AMERICAN EXPRESS

INTERNATIONAL, INC. (PHILIPPINE BRANCH), G.R. No. 152609, June 29, 2005)

BIR Ruling No. DA-489-03 is a general interpretative rule because it is a response to a query made, not by a particular taxpayer, but by a government agency tasked with processing tax refunds and credits. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional. (TEAM

ENERGY CORPORATION (Formerly MIRANT PAGBILAO CORPORATION) v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 197760, January 13, 2014) d) Penal provisions of tax laws

In criminal cases, statutes of limitations are acts of grace, a surrendering by the sovereign of its right to prosecute. They receive strict construction in favour of the Government and limitations in such cases will not be presumed in the absence of clear legislation. (LIM, et al. v. COURT OF

APPEALS, G.R. No. 48134-37, October 18, 1990)

e) Non-retroactive application to taxpayers Revenue statutes are substantive laws and in no sense must their application be equated with that of remedial laws. As well said in a prior case, revenue laws are not intended to be liberally construed. (COMMISSIONER OF INTERNAL REVENUE v. ROSEMARIE ACOSTA, G.R. No.

154068, August 3, 2007) (i) Exceptions

While it is a settled principle that rulings, circulars, rules and regulations promulgated by the BIR have no retroactive application if to so apply them would be prejudicial to the taxpayers, this rule does not apply: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. Not being the taxpayer who, in the first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing principle on non-retroactivity of BIR rulings. (COMMISSIONER

OF INTERNAL REVENUE v. FILINVEST DEVELOPMENT CORPORATION, G.R. No. 163653, July 19, 2011) I. Scope and limitation of taxation 1. Inherent limitations a) Public purpose Bar Ops Pilipinas 2015 Philippine Association of Law Schools

16 Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III, Section 5 of P.D. 1468 completely ignore the fact that coco-levy funds are public funds raised through taxation. And since taxes could be exacted only for a public purpose, they cannot be declared private properties of individuals although such individuals fall within a distinct group of persons.

(PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)

The Court of course grants that there is no hard-and-fast rule for determining what constitutes public purpose. But the assailed provisions, which removed the coco-levy funds from the general funds of the government and declared them private properties of coconut farmers, do not appear to have a color of social justice for their purpose. (PAMBANSANG KOALISYON NG

MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)

It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of "public purpose." (PLANTERS PRODUCTS, INC. v. FERTIPHIL CORPORATION,

G.R. No. 166006, March 14, 2008)

Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. (PLANTERS PRODUCTS, INC. v. FERTIPHIL

CORPORATION, G.R. No. 166006, March 14, 2008) b) Inherently legislative (i) General rule

The power to tax is purely legislative, and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers. ((Pepsi-Cola Bottling Company of the Phil. V. Mun. of Tanauan,

Leyte, 69 SCRA 460)

The powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a complete law – complete as to the time when it shall take effect and as to whom it shall be applicable – and to determine the expediency of its enactment. (ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.

ALCANTARA and ED VINCENT S. ALBANO v. THE HONORABLE EXECUTIVE SECRETARY G.R. No. 168056 September 1, 2005) (ii) Exceptions (a) Delegation to local governments The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before,

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

17 but pursuant to direct authority conferred by Section 5, Article X of the Constitution. (MCIAA v.

Marcos, G.R. No. 120082 September 11, 1996)

The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of local government units. It may also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises.

(MCIAA v. Marcos, G.R. No. 120082 September 11, 1996)

Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (NATIONAL POWER CORPORATION v. CITY OF

CABANATUAN G.R. No. 149110 April 9, 2003)

Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of local government units’ delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan, "the power to tax is [still] primarily vested in the Congress." (QUEZON CITY, et al. v. ABS-CBN

BROADCASTING CORPORATION, G.R. No. 162015, March 6, 2006)

Section 5, Article X of the Constitution does not change the doctrine that municipal corporations do not possess inherent powers of taxation; what it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue and they no longer have to wait for a statutory grant of these powers and the power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations; henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. (QUEZON CITY, et al. v. ABS-CBN BROADCASTING CORPORATION, G.R. No.

162015, March 6, 2006)

(b) Delegation to the President Assuming that Section 28(2) Article VI did not exist, the enactment of the SMA [Safeguard Measure Act] by Congress would be voided on the ground that it would constitute an undue delegation of the legislative power to tax. The constitutional provision shields such delegation from constitutional infirmity, and should be recognized as an exceptional grant of legislative power to the President, rather than the affirmation of an inherent executive power. (SOUTHERN

CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)

When Congress tasks the President or his/her alter egos to impose safeguard measures under the delineated conditions, the President or the alter egos may be properly deemed as agents of Congress to perform an act that inherently belongs as a matter of right to the legislature. It is basic agency law that the agent may not act beyond the specifically delegated powers or Bar Ops Pilipinas 2015 Philippine Association of Law Schools

18

(SOUTHERN CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005) disregard

the

restrictions

imposed

by

the

principal.

Delegation of legislative powers to the President is permitted in Sections 23 (2) and 28 (2) of Article VI of the Constitution. By virtue of a valid delegation of legislative power, it may also be exercised by the President and administrative boards, as well as the lawmaking bodies of all municipal levels, including the barangay. (Camarines North Electric Cooperative v. Torres, GR

No. 127249, February 27, 1998)

(c) Delegation to administrative agencies Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority. While the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them, including the power to determine the existence of facts on which its operation depends. (ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.

ALCANTARA and ED VINCENT S. ALBANO v. THE HONORABLE EXECUTIVE SECRETARY G.R. No. 168056 September 1, 2005)

In the present case, in making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate; he is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the former for that of the latter. (ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA

and ED VINCENT S. ALBANO v. THE HONORABLE EXECUTIVE SECRETARY G.R. No. 168056 September 1, 2005) c) Territorial (i) Situs of taxation (a) Meaning (b) Situs of income tax The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered.

(COMMISSIONER OF INTERNAL REVENUE v. JULIANE BAIER-NICKEL, G.R. No. 153793, August 29, 2006) (1) From sources within the Philippines The reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance premiums, and Bar Ops Pilipinas 2015 Philippine Association of Law Schools

19 the same took place in the Philippines. (Alexander Howden & Co., Ltd. v. Collector of Internal

Revenue as cited in COMMISSIONER OF INTERNAL REVENUE v. JULIANE BAIER-NICKEL, G.R. No. 153793, August 29, 2006) The "sale of tickets" in the Philippines is the "activity" that produced the income and therefore BOAC should pay income tax in the Philippines because it undertook an income producing activity in the country. The tickets exchanged hands here and payments for fares were also made here in Philippine currency; thus, the situs of the source of payments is the Philippines.

(Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC) as cited in COMMISSIONER OF INTERNAL REVENUE v. JULIANE BAIER-NICKEL, G.R. No. 153793, August 29, 2006) For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activities within this country regardless of the absence of flight operations within Philippine territory. Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being the paramount objective. (COMMISSIONER OF

INTERNAL REVENUE v. JAPAN AIR LINES, INC., G.R. No. 60714, March 6, 1991) (2) From sources without the Philippines (3) Income partly within and partly without the Philippines (c) Situs of property taxes (1) Taxes on real property (2) Taxes on personal property (d) Situs of excise tax

Since it partakes of the nature of an excise tax, the situs of taxation is the place where the privilege is exercised, in this case in the City of Iriga, where CASURECO III has its principal office and from where it operates, regardless of the place where its services or products are delivered. (CITY OF IRIGA v. CAMARINES SUR III ELECTRIC COOPERATIVE, INC., G.R. No.

192945, September 5, 2012)

(1) Estate tax (2) Donor’s tax (e) Situs of business tax (1) Sale of real property (2) Sale of personal property It is not the place where the contract was perfected, but the place of delivery which determines the taxable situs of the property sought to be taxed. In the cases of Soriano y Cia. v. Collector of Internal Revenue, 51 O.G. 4548; Vegetable Oil Corporation v. Trinidad, 45 Phil. 822; and Earnshaw Docks and Honolulu Iron Works vs. Collector of Internal Revenue, 54 Phil. 696, it has been ruled that for a sale to be taxed in the Philippines it must be consummated there; thus indicating that the place of consummation (associated with the delivery of the things subject matter of the contract) is the accepted criterion in determining the situs of the contract for purposes of taxation, and not merely the place of the perfection of the contract.

(THE MUNICIPALITY OF JOSE PANGANIBAN, PROVINCE OF CAMARINES NORTE, ETC. v. THE SHELL COMPANY OF THE PHILIPPINES, LTD., G.R. No. L-18349, July 30, 1966) Bar Ops Pilipinas 2015 Philippine Association of Law Schools

20 (3) Value-Added Tax (VAT) As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed; thus, exports are zero-rated, while imports are taxed. (COMMISSIONER OF INTERNAL REVENUE

v.AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), G.R. No. 152609, June 29, 2005) Consumption is "the use of a thing in a way that thereby exhausts it,” and applied to services, the term means the performance or "successful completion of a contractual duty, usually resulting in the performer’s release from any past or future liability." The services rendered by respondent are performed or successfully completed upon its sending to its foreign client the drafts and bills it has gathered from service establishments here; thus, its services, having been performed in the Philippines, are also consumed in the Philippines. (COMMISSIONER OF

INTERNAL REVENUE v.AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), G.R. No. 152609, June 29, 2005)

Unlike goods, services cannot be physically used in or bound for a specific place where their destination is determined but instead, there can only be a "predetermined end of a course" when determining the service "location or position for legal purposes." Respondent’s facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. (COMMISSIONER OF INTERNAL REVENUE v.AMERICAN

EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), G.R. No. 152609, June 29, 2005) d) International comity e) Exemption of government entities, agencies, and instrumentalities

The Court rules that the Authority [PFDA] is not a GOCC but an instrumentality of the national government which is generally exempt from payment of real property tax. However, said exemption does not apply to the portions of the IFPC which the Authority leased to private entities. (Philippine Fisheries Development Authority v. Court of Appeals, G.R. No. 169836, 31

July 2007)

As property of public dominion, the Lucena Fishing Port Complex is owned by the Republic of the Philippines and thus exempt from real estate tax. (PHILIPPINE FISHERIES DEVELOPMENT

AUTHORITY (PFDA) v. CENTRAL BOARD OF ASSESSMENT APPEALS, G.R. No. 178030, December 15, 2010) 2. Constitutional limitations a) Provisions directly affecting taxation (i) Prohibition against imprisonment for non-payment of poll tax (ii) Uniformity and equality 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. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation; inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. Bar Ops Pilipinas 2015 Philippine Association of Law Schools

21

(KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC. v. HON. BIENVENIDO TAN, G.R. No. 81311, June 30, 1988) (iii) Grant by Congress of authority to the president to impose tariff rates It is Congress which authorizes the President to impose tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts. Thus, the authority cannot come from the Finance Department, the National Economic Development Authority, or the World Trade Organization, no matter how insistent or persistent these bodies may be. (SOUTHERN

CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005) The authorization granted to the President must be embodied in a law. Hence, the justification cannot be supplied simply by inherent executive powers. (SOUTHERN CROSS CEMENT

CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)

The authorization to the President can be exercised only within the specified limits set in the law and is further subject to limitations and restrictions which Congress may impose. Consequently, if Congress specifies that the tariff rates should not exceed a given amount, the President cannot impose a tariff rate that exceeds such amount. (SOUTHERN CROSS CEMENT

CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005) Assuming there is a conflict between the specific limitation in Section 28 (2), Article VI of the Constitution and the general executive power of control and supervision, the former prevails in the specific instance of safeguard measures such as tariffs and imposts, and would thus serve to qualify the general grant to the President of the power to exercise control and supervision over his/her subalterns. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT

MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)

(iv) Prohibition against taxation of religious, charitable entities, and educational entities The word "charitable" is not restricted to relief of the poor or sick. The test whether an enterprise is charitable or not is whether it exists to carry out a purpose recoganized in law as charitable or whether it is maintained for gain, profit, or private advantage. (LUNG CENTER OF

THE PHILIPPINES v.QUEZON CITY, G.R. No. 144104, June 29, 2004)

Even as we find that the petitioner is a charitable institution, we hold that those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. (LUNG CENTER

OF THE PHILIPPINES v.QUEZON CITY, G.R. No. 144104, June 29, 2004)

To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. Charity is essentially a gift to an indefinite number of persons which Bar Ops Pilipinas 2015 Philippine Association of Law Schools

22 lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government.

(COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

In Lung Center, this Court declared: "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." The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with exclusively. (COMMISSIONER OF

INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

Services to paying patients are activities conducted for profit. There is a "purpose to make profit over and above the cost" of services. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S

MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B). (COMMISSIONER OF INTERNAL REVENUE v.

ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an impairment of the Constitution. The phrase "exempt from taxation," as employed in the Constitution should not be interpreted to mean exemption from all kinds of taxes. (REV. FR. CASIMIRO LLADOC v. The COMMISSIONER OF INTERNAL REVENUE, G.R. No.

L-19201, June 16, 1965)

(v) Prohibition against taxation of non-stock, non-profit institutions An organization may be considered as non-profit if it does not distribute any part of its income to stockholders or members. However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Section 30. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL

CENTER, INC. G.R. No. 195909 September 26, 2012)

(vi) Majority vote of Congress for grant of tax exemption The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support therein. The challenged grant of tax exemption would circumvent the Constitution's imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. (JOHN HAY PEOPLES

ALTERNATIVE COALITION, et al. v. VICTOR LIM, et al., G. R. No. 119775, October 24, 2003)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

23 (vii) Prohibition on use of tax levied for special purpose The coco-levy funds, on the other hand, belong to the government and are subject to its administration and disposition. Thus, these funds, including its incomes, interests, proceeds, or profits, as well as all its assets, properties, and shares of stocks procured with such funds must be treated, used, administered, and managed as public funds; the coco-levy funds are evidently special funds. (PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA

SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012) (viii) President’s veto power on appropriation, revenue, tariff bills

An "item" in a revenue bill does not refer to an entire section imposing a particular kind of tax, but rather to the subject of the tax and the tax rate; thus, in the portion of a revenue bill which actually imposes a tax, a section identifies the tax and enumerates the persons liable therefor with the corresponding tax rate. To construe the word "item" as referring to the whole section would tie the President's hand in choosing either to approve the whole section at the expense of also approving a provision therein which he deems unacceptable or veto the entire section at the expense of foregoing the collection of the kind of tax altogether. (COMMISSIONER OF

INTERNAL REVENUE v. HON. COURT OF TAX APPEALS, G.R. No. L-47421, May 14, 1990)

(ix) Non-impairment of jurisdiction of the Supreme Court (x) Grant of power to the local government units to create its own sources of revenue For a long time, the country's highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose.

(NATIONAL POWER CORPORATION v. CITY OF CABANATUAN G.R. No. 149110 April 9, 2003)

Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the payment of local franchise tax; it merely replaced the national franchise tax that was previously paid by telecommunications franchise holders and in its stead VAT. The imposition of local franchise tax is not inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the national government for VAT inures to the benefit of the national government, while a local franchise tax is a revenue of the local government unit. (SMART

COMMUNICATIONS, INC. v.THE CITY OF DAVAO, G.R. No. 155491, July 21, 2009) (xi) Flexible tariff clause (xii) Exemption from real property taxes

For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the property and this test requires that the institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes since the effect of failing to meet the use requirement is simply to remove from the tax exemption that portion of the property not devoted to charity. (COMMISSIONER OF Bar Ops Pilipinas 2015 Philippine Association of Law Schools

24

INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012) The Constitution exempts charitable institutions only from real property taxes while the NIRC extends the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution: Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax while Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution "actually, directly and exclusively" use the property for a charitable purpose.

(COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)

To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property "actually, directly and exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized and operated exclusively" for charitable purposes.

(COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012) (xiii) No appropriation or use of public money for religious purposes b) Provisions indirectly affecting taxation (i) Due process

In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But in the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer. (Chamber of Real Estate and Builders’ Association,

Inc. v. Romulo, 614 SCRA 605 (2010))

The support for the poor is generally recognized as a public duty and has long been an accepted exercise of police power in the promotion of the common good but, in the instant case, the declarations do not distinguish between wealthy coconut farmers and the impoverished ones. Consequently, such declarations are void since they appropriate public funds for private purpose and, therefore, violate the citizens’ right to substantive due process.

(PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012) (ii) Equal protection

The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. What distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. (Chamber of Real Estate

and Builders’ Association, Inc. v. Romulo, 614 SCRA 605 (2010))

PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Bar Ops Pilipinas 2015 Philippine Association of Law Schools

25 Ways and Means, show that PAGCOR’s exemption from payment of corporate income tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid classification based on substantial distinctions. The legislative records show that the basis of the grant of exemption to PAGCOR from corporate income tax was PAGCOR’s own request to be exempted. (PHILIPPINE AMUSEMENT AND GAMING

CORPORATION (PAGCOR) v. THE BUREAU OF INTERNAL REVENUE G.R. No. 172087 March 15, 2011) (iii) Religious freedom

The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. 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.

(AMERICAN BIBLE SOCIETY v. CITY OF MANILA, G.R. No. L-9637, April 30, 1957)

It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some instances a little bit higher than the actual cost of the same but this cannot mean that appellant was engaged in the business or occupation of selling said "merchandise" for profit. For this reason We believe that the City of Manila Ordinance No. 2529 requiring the payment of license fee cannot be applied to appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession and worship as well as its rights of dissemination of religious beliefs. (AMERICAN BIBLE SOCIETY v. CITY OF MANILA,

G.R. No. L-9637, April 30, 1957)

With respect to Ordinance No. 3000 which requires the obtention of the Mayor's permit before any person can engage in any of the businesses, trades or occupations enumerated therein, We do not find that it imposes any charge upon the enjoyment of a right granted by the Constitution, nor tax the exercise of religious practices. But as the City of Manila is powerless to license or tax the business of plaintiff Society, We find that Ordinance No. 3000 is also inapplicable to said business, trade or occupation of the plaintiff. (AMERICAN BIBLE SOCIETY v.

CITY OF MANILA, G.R. No. L-9637, April 30, 1957)

The Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the sales are used to subsidize the cost of printing copies which are given free to those who cannot afford to pay so that to tax the sales would be to increase the price, while reducing the volume of sale. Granting that to be the case, the resulting burden on the exercise of religious freedom is so incidental as to make it difficult to differentiate it from any other economic imposition that might make the right to disseminate religious doctrines costly. (ARTURO M.

TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

On the other hand the registration fee of P1,000.00 imposed by Sec. 107 of the NIRC, as amended by Sec. 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration and enforcement of provisions such as those relating to accounting in Sec. 108 of the NIRC. That the PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the payment of this fee because it also sells some copies.

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26

(ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995) The withdrawal of the exemption did not also violate freedom of religion as regards the activities of PBS on religious articles, as the Free Exercise of Religious clause does not prohibit imposing a generally applicable sale and use tax on the sale of religious materials by a religious organization as held by the US Supreme Court in Jimmy Swaggart Ministries v. Board of

Equalization (1990).

The VAT registration fee does not constitute censorship of such freedom as held in the American Bible Society case. The fee is a mere administrative fee and not imposed on the exercise of a privilege, much less a constitutional right. But for the purpose of defraying cost of registration which is a requirement and a central feature in the VAT system so as to provide record of tax credits of the taxpayer. (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE

and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995) (iv) Non-impairment of obligations of contracts

Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. but these contractual tax exemptions are not to be confused with tax exemptions granted under franchises—the latter partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. (PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) v. THE

BUREAU OF INTERNAL REVENUE G.R. No. 172087 March 15, 2011)

Even though such taxation may affect particular contracts, as it may increase the debt of one person and lessen the security of another, or may impose additional burdens upon one class and release the burdens of another, still the tax must be paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of any existing contract in its true legal sense." Indeed not only existing laws but also "the reservation of the essential attributes of sovereignty, is read into contracts as a postulate of the legal order." (ARTURO M.

TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995) J. Stages of taxation 1. Levy

Levy is an exercise of the power to tax, which is exclusively legislative in nature and character. Clearly, taxes are not levied by the executive branch of government. (NPC v. Albay, 186 SCRA

198 (1990))

2. Assessment and collection 3. Payment 4. Refund Bar Ops Pilipinas 2015 Philippine Association of Law Schools

27 K. Definition, nature, and characteristics of taxes Taxes are enforced proportional 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.

(PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012) L. Requisites of a valid tax M. Tax as distinguished from other forms of exactions 1. Tariff 2. Toll A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures; toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership. (RENATO V. DIAZ and AURORA

MA. F. TIMBOL v. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

Fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. (RENATO V. DIAZ and AURORA MA. F. TIMBOL v. THE SECRETARY OF

FINANCE, G.R. No. 193007, July 19, 2011) 3. License fee

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 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. Accordingly, a charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of police power. (PROGRESSIVE DEVELOPMENT CORP. v.

QUEZON CITY, G.R. No. L-36081, April 24, 1989)

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. (LAND TRANSPORTATION OFFICE v. CITY

OF BUTUAN, G.R. No. 131512, January 20, 2000) 4. Special assessment 5. Debt

Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. (CALTEX PHILIPPINES, INC. v. THE

HONORABLE COMMISSION ON AUDIT, G.R. No. 92585, May 8, 1992)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

28 N. Kinds of taxes 1. As to object a) Personal, capitation, or poll tax b) Property tax c) Privilege tax A contractor's tax is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. (COMMISSIONER OF INTERNAL REVENUE v. MARUBENI CORPORATION, G.R. No.

137377, December 18, 2001)

A franchise tax is a tax on the privilege of transacting corporate franchises granted by the state. It is not levied as a corporation, upon its property or its income, but on granted to it by the government. (CITY OF IRIGA

business in the state and exercising on the corporation simply for existing its exercise of the rights or privileges

v. CAMARINES SUR III ELECTRIC COOPERATIVE, INC., G.R. No. 192945, September 5, 2012) 2. As to burden or incidence a) Direct b) Indirect In context, direct taxes are those that are exacted from the very person who, it is 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. On the other hand, 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. (COMMISSIONER OF INTERNAL

REVENUE VS PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, G.R. No. 140230, December 15, 2005)

Indirect taxes, like VAT and excise tax, are different from withholding taxes: To distinguish, in indirect taxes, the incidence of taxation 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. On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions and remits the same to the government. (ASIA INTERNATIONAL AUCTIONEERS, INC. v. COMMISSIONER OF

INTERNAL REVENUE G.R. No. 179115 September 26, 2012)

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive since what it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are to be preferred [and] as much as possible, indirect taxes should be minimized." (ARTURO

M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

29 The seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in order to purchase the good, property or service. (RENATO V. DIAZ and AURORA MA. F. TIMBOL

v. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011) 3. As to tax rates a) Specific b) Ad valorem c) Mixed 4. As to purposes a) General or fiscal b) Special, regulatory, or sumptuary 5. As to scope or authority to impose a) National – internal revenue taxes b) Local – real property tax, municipal tax 6. As to graduation a) Progressive b) Regressive c) Proportionate

INCOME TAXATION A. Income taxation 1. Income tax systems a) Global tax system Global treatment is a system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. (TAN v. DEL ROSARIO, JR. 237 SCRA 324) b) Schedular tax system Schedular approach is a system employed where the income tax treatment varies and made to depend on the kind or category of taxable income of the taxpayer. (TAN v. DEL ROSARIO, JR. 237 SCRA 324) c) Semi-schedular or semi-global tax system 2. Features of the Philippine income tax law a) Direct tax b) Progressive c) Comprehensive d) Semi-schedular or semi-global tax system 3. Criteria in imposing Philippine income tax a) Citizenship principle b) Residence principle c) Source principle A non-resident German citizen, president of a domestic corporation, filed a claim for refund with the BIR, contending that her sales commission income is not taxable in the Philippines because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside Bar Ops Pilipinas 2015 Philippine Association of Law Schools

30 the Philippines. While it is the rule that “source of income” relates to the property, activity or service that produced the income, the documents presented by respondent did not constitute substantial evidence that it was in Germany where she performed the income-producing service and thus the tax refund should be denied. (Commissioner of Internal Revenue vs. Juliane Baier-Nickel, G.R. No. 153793, August 29, 2006) 4. Types of Philippine income tax 5. Taxable period a) Calendar period b) Fiscal period c) Short period 6. Kinds of taxpayers a) Individual taxpayers (i) Citizens (a) Resident citizens (b) Non-resident citizens (ii) Aliens (a) Resident aliens (b) Non-resident aliens (1) Engaged in trade or business (2) Not engaged in trade or business (iii) Special class of individual employees (a) Minimum wage earner (b) Corporations (i) Domestic corporations (ii) Foreign corporations Marubeni Japan claimed a refund for excess taxes it had paid, contending that since it had a Philippine branch, it is a resident foreign corporation liable to pay only 10% intercorporate final tax on dividends received from a domestic corporation (and not to the branch profit remittance tax) following the principal-agent theory. Marubeni Japan is considered a non-resident foreign corporation as to the dividends because when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. (Marubeni Corp. vs.

Commissioner of Internal Revenue, et al., G.R. No. 76573, September 14, 1989) BOAC is a resident foreign corporation because it maintained a general sales agent in the Philippines. There is no specific criterion as to what constitutes “doing” or “engaging in” or "transacting” business. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of Bar Ops Pilipinas 2015 Philippine Association of Law Schools

31 commercial gain or for the purpose and object of the business organization. In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. (CIR vs BOAC, G.R. No. L-65773-74 April 30, 1987) (a) Resident foreign corporations (b) Non-resident foreign corporations (iii) Joint venture and consortium c) Partnerships Pursuant to “reinsurance treaties,” a number of local insurance firms formed themselves into a “pool” in order to facilitate the handling of business contracted with a nonresident foreign reinsurance company. The insurance pool is deemed a partnership or association taxable as a corporation under the NIRC because Section 24 (on tax on corporations) [now Sec. 27 of the 1997 NIRC] covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart from their individual members; moreover, the insurance pool, though unregistered, satisfies the requisites of a partnership: (1) mutual contribution to a common stock, and (2) joint interest in the profits. (Afisco Insurance Corp., et al. vs. Court of Appeals, et al., G.R. No. 112675, January 25, 1999) The original purpose of the co-owners of the two lots was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property (Obillos Jr. vs CIR, G.R. No. L68118, October 29, 1985) d) General professional partnerships e) Estates and trusts f) Co-ownerships 7. Income taxation a) Definition b) Nature c) General principles 8. Income a) Definition b) Nature c) When income is taxable (i) Existence of income (ii) Realization of income (a) Tests of realization (b) Actual vis-à-vis constructive receipt (iii) Recognition of income Bar Ops Pilipinas 2015 Philippine Association of Law Schools

32 (iv) Methods of accounting (a) Cash method vis-à-vis accrual method The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment. For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. (CIR vs Isabela Cultural Corp., GR 172231, February 12, 2007) (b) Installment payment vis-à-vis deferred payment vis-àvis percentage completion (in long-term contracts) d) Tests in determining whether income is earned for tax purposes (i) Realization test (ii) Claim of right doctrine or doctrine of ownership, command, or control (iii) Economic benefit test, doctrine of proprietary interest (iv) Severance test (v) All events test 9. Gross income a) Definition b) Concept of income from whatever source derived c) Gross income vis-à-vis net income vis-à-vis taxable income d) Classification of income as to source (i) Gross income and taxable income from sources within the Philippines (ii) Gross income and taxable income from sources without the Philippines (iii) Income partly within or partly without the Philippines e) Sources of income subject to tax (i) Compensation income (ii) Fringe benefits (a) Special treatment of fringe benefits (b) Definition (c) Taxable and non-taxable fringe benefits (iii) Professional income (iv) Income from business (v) Income from dealings in property (a) Types of properties (1) Ordinary assets Bar Ops Pilipinas 2015 Philippine Association of Law Schools

33 (2) Capital assets The proceeds from the inherited land of petitioners, which they subdivided into small lots and in the process converted into a residential subdivision and given the name Don Mariano Subdivision, is taxable as ordinary income. Property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or business; thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable--however, if the inherited property is substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heir's business. (Tomas Calasanz, et al. vs.

Commissioner of Internal Revenue, et al., G.R. No. L26284, October 9, 1986)

(b) Types of gains from dealings in property (1) Ordinary income vis-à-vis capital gain (2) Actual gain vis-à-vis presumed gain (3) Long term capital gain vis-à-vis short-term capital gain (4) Net capital gain, net capital loss (5) Computation of the amount of gain or loss (6) Income tax treatment of capital loss (a) Capital loss limitation rule (applicable to both corporations and individuals) (b) Net loss carry-over rule (applicable only to individuals) (7) Dealings in real property situated in the Philippines (8) Dealings in shares of stock of Philippine corporations (a) Shares listed and traded in the stock exchange (b) Shares not listed and traded in the stock exchange (9) Sale of principal residence (vi) Passive investment income (a) Interest income (b) Dividend income (1) Cash dividend (2) Stock dividend Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere issuance thereof is not yet subject to Bar Ops Pilipinas 2015 Philippine Association of Law Schools

34 income tax as they are nothing but an enrichment through increase in value of capital investment. However, the redemption or cancellation of stock dividends, depending on the time and manner it was made, is essentially equivalent to a distribution of taxable dividends, making the proceeds thereof taxable income to the extent it represents profits. The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends, which is taxable. (CIR vs CA, G.R. No. 108576 January 20, 1999) (3) Property dividend (4) Liquidating dividend (c) Royalty income (d) Rental income (1) Lease of personal property (2) Lease of real property (3) Tax treatment of (a) Leasehold improvements by lessee (b) VAT added to rental/paid by the lessee (c) Advance rental/long term lease (vii) Annuities, proceeds from life insurance or other types of insurance (viii) Prizes and awards (ix) Pensions, retirement benefit, or separation pay (x) Income from any source whatever (a) Forgiveness of indebtedness (b) Recovery of accounts previously written-off – when taxable/when not taxable (c) Receipt of tax refunds or credit (d) Income from any source whatever (e) Source rules in determining income from within and without (1) Interests (2) Dividends (3) Services (4) Rentals (5) Royalties (6) Sale of real property (7) Sale of personal property (8) Shares of stock of domestic corporation (f) Situs of income taxation (see page 2 under inherent limitations, territorial) (g) Exclusions from gross income (1) Rationale for the exclusions (2) Taxpayers who may avail of the exclusions (3) Exclusions distinguished from deductions and tax credit (4) Under the Constitution

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

35 (a) Income derived by the government or its political subdivisions from the exercise of any essential governmental function (5) Under the Tax Code (a) Proceeds of life insurance policies (b) Return of premium paid (c) Amounts received under life insurance, endowment or annuity contracts (d) Value of property acquired by gift, bequest, devise or descent (e) Amount received through accident or health insurance (f) Income exempt under tax treaty (g) Retirement benefits, pensions, gratuities, etc. Respondent terminated petitioner’s services due to her illness, rendering her incapable of continuing to work, and gave her retirement benefits but withheld the tax due thereon. The retirements benefits are taxable because the petitioner was only 41 yrs old at the time of retirement and had rendered only 8 years of service; for these benefits to be exempt from tax, the following requisites must concur: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least ten (10) years; (3) the retiring official or employee is not less than fifty (50) years of age at the time of his retirement; and (4) the benefit had been availed of only once. (Ma. Isabel T. Santos vs. Servier Phil., Inc., et al., G.R. No. 166377, November 28, 2008) Respondents contend that petitioner did not withhold the taxes due on their retirement benefits because it had obliged itself to pay the taxes due thereon. This was done to induce respondents to agree to avail of the optional retirement scheme. It was only when respondents demanded the payment of their salary differentials that petitioner alleged, for the first time, that it had failed to present the 1993 CBA to the BIR for approval, rendering such retirement benefits not exempt from taxes; consequently, they were obliged to refund to it the amounts it had remitted to the BIR in payment of their taxes. Petitioner used this “failure” as an afterthought, as an excuse for its refusal to remit to the respondents their salary differentials. Patently, petitioner is estopped from doing so. It cannot renege on its commitment to pay the taxes on respondents’ retirement benefits on the pretext that the “new management” had found the policy disadvantageous. (Intercontinental Broadcasting Corp. vs. Noemi B. Amarilla, et al., G.R. No. 162775, October 27, 2006) Bar Ops Pilipinas 2015 Philippine Association of Law Schools

36 Severance of employment is a condition sine qua non for the release of retirement benefits. Retirement benefits are not meant to recompense employees who are still in the employ of the government. (Dev’t. Bank of the Phil. vs. Commission on Audit, G.R. No. 144516, February 11, 2004) (h) Winnings, prizes, and awards, including those in sports competition (6) Under special laws (a) Personal Equity and Retirement Account (h) Deductions from gross income (1) General rules (a) Deductions must be paid or incurred in connection with the taxpayer’s trade, business or profession (b) Deductions must be supported by adequate receipts or invoices (except standard deduction) (c) Additional requirement relating to withholding (2) Return of capital (cost of sales or services) (a) Sale of inventory of goods by manufacturers and dealers of properties (b) Sale of stock in trade by a real estate dealer and dealer in securities (c) Sale of services (3) Itemized deductions (a) Expenses (1) Requisites for deductibility (a) Nature: ordinary and necessary The expenses paid by Atlas for the services rendered by a public relations firm, aimed at creating a favorable image for Atlas, is not an allowable deduction as business expense under the NIRC. Efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses related thereto are not business expense but capital expenditures. (Atlas

Consolidated Mining & Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981) A stock listing fee paid annually to a stock exchange for the privilege of having a corporation’s stock listed is an ordinary and business expense. This is distinguished from a single payment made to the stock Bar Ops Pilipinas 2015 Philippine Association of Law Schools

37 exchange, which is considered a capital expenditure. (Atlas Consolidated Mining &

Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981)

The subject media advertising expense for “Tang” incurred by respondent corporation was not an ordinary and necessary expense, but rather a capital expenditure because it failed the two conditions set by U.S. jurisprudence in determining whether or not it is an “ordinary” expense: first, reasonableness of the amount incurred and second, the amount incurred must not be a capital outlay to create “goodwill” for the product and/or private respondent’s business. The subject expense for the advertisement of a single product is inordinately large; furthermore, the corporation’s venture to protect its brand franchise was tantamount to efforts to establish a reputation and was akin to the acquisition of capital assets. (Commissioner

of Internal Revenue vs. General Foods, Inc., G.R. No. 143672, April 24, 2003) (b) Paid and incurred during taxable year (2) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid Payment by the taxpayer-corporation to its controlling stockholder (Hoskins) of 50% of its supervision fees (paid by a client of the corporation for the latter's services as managing agent of a subdivision project) or the amount of P99,977.91 is not a deductible ordinary and necessary expense because it does not pass the test of reasonable compensation. If independently, a one-time P100,000.00-fee to plan and lay down the rules for supervision of a subdivision project were to be paid to an experienced realtor such as Hoskins, its fairness and deductibility by the taxpayer could be Bar Ops Pilipinas 2015 Philippine Association of Law Schools

38 conceded; however, the fee paid to Hoskins continued every year since 1955 up to 1963 and for as long as its contract with the subdivision owner subsisted, regardless of whether services were actually rendered by Hoskins. (C. M. Hoskins & Co.,

Inc. vs. Commissioner of Internal Revenue, G.R. No. L-24059, November 28, 1969)

(3) Travelling/transportation expenses (4) Cost of materials (5) Rentals and/or other payments for use or possession of property (6) Repairs and maintenance (7) Expenses under lease agreements (8) Expenses for professionals (9) Entertainment/Representation expenses (10) Political campaign expenses (11) Training expenses (b) Interest (1) Requisites for deductibility (2) Non-deductible interest expense (3) Interest subject to special rules (a) Interest paid in advance (b) Interest periodically amortized (c) Interest expense incurred to acquire property for use in trade/business/profession (d) Reduction of interest expense/interest arbitrage (c) Taxes Margin fees paid by the petitioner to the Central Bank on its profit remittances to its New York head office are not allowable deductions as taxes because it is not a tax but an exaction designed to curb the excessive demands upon our international reserve. Margin fees are also not ordinary and necessary business expenses because they are not expenses in connection with the production or earning of petitioner's incomes in the Philippines; they were expenses incurred in the disposition of said incomes. (Esso Standard

Eastern, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 28508-9, July 7, 1989)

(1) Requisites for deductibility (2) Non-deductible taxes (3) Treatments of surcharges/interests/fines for delinquency (4) Treatment of special assessment (5) Tax credit vis-à-vis deduction

(d) Losses Bar Ops Pilipinas 2015 Philippine Association of Law Schools

39 (1) Requisites for deductibility (2) Other types of losses (a) Capital losses (b) Securities becoming worthless “Securities becoming worthless” resulting from China Bank’s equity investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary, is capital loss and not an ordinary loss. An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss; shares of stock would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. (China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000) (c) Losses on wash sales of stocks or securities (d) Wagering losses (e) Net Operating Loss Carry-Over (NOLCO) (e) Bad debts In claiming deductions for bad debts, the only evidentiary support given by PRC was the explanation posited by its accountant, whose allegations were not supported by any documentary evidence. One of the requisites to qualify as “bad debt” is that the debt must be actually ascertained to be worthless and uncollectible during the taxable year, and the taxpayer must prove that he exerted diligent efforts to collect the debts by (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court. (Philippine Refining Company vs. Court of Appeals, et al., G.R. No. 118794, May 8, 1996) (1) Requisites for deductibility (2) Effect of recovery of bad debts (f) Depreciation Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property Bar Ops Pilipinas 2015 Philippine Association of Law Schools

40 gradually waste, without making provision out of earnings for its replacement. (Basilan Estates, Inc. vs.

Commissioner of Internal Revenue, et al., G.R. No. L22492, September 5, 1967) Both depletion and depreciation are predicated on the same basic promise of avoiding a tax on capital. The allowance for depletion is based on the theory that the extraction of minerals gradually exhausts the capital investment in the mineral deposit. The purpose of the depiction deduction is to permit the owner of a capital interest in mineral in place to make a tax-free recovery of that depleting capital asset. A depletion is based upon the concept of the exhaustion of a natural resource whereas depreciation is based upon the concept of the exhaustion of the property, not otherwise a natural resource, used in a trade or business or held for the production of income. Thus, depletion and depreciation are made applicable to different types of assets. And a taxpayer may not deduct that which the Code allows as of another. (Consolidated

Mines, Inc. vs. Court of Tax Appeals, et al., G.R. Nos. L18843 & 18844, August 29, 1974) (1) Requisites for deductibility (2) Methods of computing depreciation allowance (a) Straight-line method (b) Declining-balance method (c) Sum-of-the-years-digit method (g) Charitable and other contributions (1) Requisites for deductibility (2) Amount that may be deducted (h) Contributions to pension trusts (1) Requisites for deductibility (i) Deductions under special laws (4) Optional standard deduction (a) Individuals, except non-resident aliens (b) Corporations, except non-resident foreign corporations (c) Partnerships (5) Personal and additional exemption (R.A. No. 9504, Minimum Wage Earner Law) The increased personal and additional exemptions under the NIRC cannot be availed of by the petitioner for purposes of computing his income tax liability for the taxable year 1997. Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual Bar Ops Pilipinas 2015 Philippine Association of Law Schools

41 taxpayer’s gross or net income, as the case maybe, for the taxable year 1998 to be filed in 1999; the NIRC made no reference that the personal and additional exemptions shall apply on income earned before January 1, 1998, and it is a rule that tax laws are to be applied prospectively unless its retroactive application is expressly provided. (Carmelino F. Pansacola vs. CIR, G.R. No. 159991, November 16, 2006) (a) Basic personal exemptions (b) Additional exemptions for taxpayer with dependents (c) Status-at-the-end-of-the-year rule (d) Exemptions claimed by non-resident aliens (6) Items not deductible (a) General rules (b) Personal, living or family expenses (c) Amount paid for new buildings or for permanent improvements (capital expenditures) (d) Amount expended in restoring property (major repairs) (e) Premiums paid on life insurance policy covering life or any other officer or employee financially interested (f) Interest expense, bad debts, and losses from sales of property between related parties (g) Losses from sales or exchange or property (h) Non-deductible interest (i) Non–deductible taxes (j) Non-deductible losses (k) Losses from wash sales of stock or securities (7) Exempt corporations (a) Propriety educational institutions and hospitals (b) Government-owned or controlled corporations (c) Others 10. Taxation of resident citizens, non-resident citizens, and resident aliens a) General rule that resident citizens are taxable on income from all sources within and without the Philippines (i) Non-resident citizens b) Taxation on compensation income (i) Inclusions (a) Monetary compensation (1) Regular salary/wage (2) Separation pay/retirement benefit not otherwise exempt (3) Bonuses, 13th month pay, and other benefits not exempt (4) Director’s fees (b) Non-monetary compensation (1) Fringe benefit not subject to tax (ii) Exclusions (a) Fringe benefit subject to tax Bar Ops Pilipinas 2015 Philippine Association of Law Schools

42 (b) De minimis benefits (c) 13th month pay and other benefits, and payments specifically excluded from taxable compensation income (iii) Deductions (a) Personal exemptions and additional exemptions (b) Health and hospitalization insurance (c) Taxation of compensation income of a minimum wage earner (1) Definition of statutory minimum wage (2) Definition of minimum wage earner (3) Income also subject to tax exemption: holiday pay, overtime pay, night-shift differential, and hazard pay c) Taxation of business income/income from practice of profession d) Taxation of passive income (i) Passive income subject to final tax (a) Interest income (i) Treatment of income from long-term deposits (b) Royalties (c) Dividends from domestic corporations (d) Prizes and other winnings (ii) Passive income not subject to final tax e) Taxation of capital gains (i) Income from sale of shares of stock of a Philippine corporation (a) Shares traded and listed in the stock exchange (b) Shares not listed and traded in the stock exchange (ii) Income from the sale of real property situated in the Philippines (iii) Income from the sale, exchange, or other disposition of other capital assets The acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being justly compensated, is embraced within the meaning of the term “sale” or “disposition of property” and the definition of gross income. Profit from the transaction constitutes capital gain. (Gonzales vs CTA, GR L-14532, May 26, 1965) 11. Taxation of non-resident aliens engaged in trade or business a) General rules b) Cash and/or property dividends c) Capital gains Exclude: non-resident aliens not engaged in trade or business 12. Individual taxpayers exempt from income tax a) Senior citizens Bar Ops Pilipinas 2015 Philippine Association of Law Schools

43 b) Minimum wage earners c) Exemptions granted under international agreements 13. Taxation of domestic corporations a) Tax payable (i) Regular tax (ii) Minimum Corporate Income Tax (MCIT) For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL incurred zero taxable income and did not pay MCIT, for which BIR assessed PAL for deficiency MCIT. PAL is not liable to pay MCIT because under its franchise, PAL has the option to pay basic corporate income tax or franchise tax, whichever is lower; and the tax so paid shall be in lieu of all other taxes, except real property tax. MCIT falls within the category of “all other taxes” from which PAL is exempted because although both are income taxes, the MCIT is different from the basic corporate income tax, not just in the rates, but also in the bases for their computation. (Commissioner of Internal Revenue vs. PAL, Inc., G.R. No. 180066, July 7, 2009) (a) Imposition of MCIT MBC being a new thrift bank is not yet liable to the MCIT since it will apply only beginning on the 4th years from commencement of its operations. The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date it was granted authority by BSP to operate as such, whichever comes later. As newly operated thrift bank it is entitled to a grace period of 4 years counted from the date when it was authorized by BSP to operate as thrift bank. MBC is entitled to the refund of the taxes paid under the MCIT. The intent of Congress relative to the MCIT is to grant a 4 year suspension of tax payment to newly formed corporations. Corporations still starting have to stabilize their venture in order to obtain stronghold in the industry. It is not a surprise when many corporations reported losses in their initial years of operations. (Manila Banking Corp. v. CIR, 499 SCRA 782) (b) Carry forward of excess minimum tax (c) Relief from the MCIT under certain conditions (d) Corporations exempt from the MCIT (e) Applicability of the MCIT where a corporation is governed both under the regular tax system and a special income tax system b) Allowable deductions (i) Itemized deductions (ii) Optional standard deduction c) Taxation of passive income (i) Passive income subject to tax Bar Ops Pilipinas 2015 Philippine Association of Law Schools

44 (a) Interest from deposits and yield, or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties (b) Capital gains from the sale of shares of stock not traded in the stock exchange (c) Income derived under the expanded foreign currency deposit system (d) Inter-corporate dividends (e) Capital gains realized from the sale, exchange, or disposition of lands and/or buildings (ii) Passive income not subject to tax d) Taxation of capital gains (i) Income from sale of shares of stock (ii) Income from the sale of real property situated in the Philippines (iii) Income from the sale, exchange, or other disposition of other capital assets e) Tax on proprietary educational institutions and hospitals St. Luke’s is a proprietary non-stock and non-profit hospital catering to nonpaying patients but also derives profit from paying patients. It is subject to the preferential tax rate of 10% for its profit-generating activities under sec. 27(B) of NIRC; it cannot be exempt from income tax under sec. 30(E) and (G) because it is not “organized and operated exclusively” for charitable purposes, which is a requirement under the aforementioned provision. (CIR vs. St. Luke's Medical Center, Inc., G.R. Nos. 195909 & 195960, September 26, 2012) f) Tax on government-owned or controlled corporations, agencies or instrumentalities 14. Taxation of resident foreign corporations a) General rule b) With respect to their income from sources within the Philippines c) Minimum Corporate Income Tax d) Tax on certain income (i) Interest from deposits and yield, or any other monetary benefit from deposit substitutes, trust funds and similar arrangements and royalties (ii) Income derived under the expanded foreign currency deposit system (iii) Capital gains from sale of shares of stock not traded in the stock exchange (iv) Inter-corporate dividends Exclude: (i) International carrier (ii) Offshore banking units (iii) Branch profits remittances (iv) Regional or area headquarters and regional operating headquarters of multinational companies Bar Ops Pilipinas 2015 Philippine Association of Law Schools

45 15. Taxation of non-resident foreign corporations a) General rule b) Tax on certain income (i) Interest on foreign loans (ii) Inter-corporate dividends (iii) Capital gains from sale of shares of stock not traded in the stock exchange Exclude: (i) Non-resident cinematographic film-owner, lessor or distributor (ii) Non-resident owner or lessor of vessels chartered by Philippine nationals (iii) Non-resident owner or lessor of aircraft machineries and other equipment 16. Improperly accumulated earnings of corporations Petitioner cannot avoid paying surtax on improperly accumulated earnings because the purchase of the U.S.A. Treasury bonds were in no way related to petitioner’s business of importing and selling wines liquors. The “immediacy test” determines the “reasonable needs” of the business in order to justify an accumulation of earnings—that is, if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply; investment of the earnings and profits of the corporation in stock or securities of an unrelated business usually indicates an accumulation beyond the reasonable needs of the business (Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, G.R. No. L-26145, February 20, 1984) BIR assessed petitioner for surtax on improperly accumulated profits, which petitioner contested. In order to determine whether profits are accumulated for the reasonable needs of the business, it must be shown that: (1) the controlling intention of the taxpayer is manifest at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts; and (2) the accumulated profits must be used within a reasonable time after the close of the taxable year. (Cyanamid Philippines, Inc. vs. Court of Appeals, et al., G.R. No. 108067, January 20, 2000) Previous accumulations should be considered in determining unreasonable accumulations for the year concerned. In determining whether accumulations of earnings or profits in a particular year are within the reasonable needs of a corporation, it is necessary to take into account prior accumulations, since accumulations prior to the year involved may have been sufficient to cover the business needs and additional accumulations during the year involved would not reasonably be necessary. (Basilan

Estates, Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22492, September 5, 1967)

17. Exemption from tax on corporations YMCA, a non-stock non-profit corporation with charitable objectives, claimed exemption from payment of income tax by invoking the NIRC and the Constitution. While the income received by the organizations enumerated in Section 26 of the NIRC is, as a rule, exempted from the payment of tax “in respect to income received by them as such,” the exemption does not apply to income derived “from any of their Bar Ops Pilipinas 2015 Philippine Association of Law Schools

46 properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income”; Moreover, charitable institutions under Art. VI, sec. 28 of the Constitution are only exempted from property taxes, and YMCA is not an educational institution under Article XIV, Section 4 of the Constitution. (Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 124043, October 14, 1998) Lung Center, charitable institution, does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. However, it is not exempt from real property tax as to the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals because under the Constitution, it is only exempt when its real properties are actually, directly, and exclusively used for charitable purposes. (Lung Center of the Phil. vs. Quezon City, et al., G.R. No. 144104, June 29, 2004) 18. Taxation of partnerships 19. Taxation of general professional partnerships 20. Withholding tax a) Concept b) Kinds (i) Withholding of final tax on certain incomes (ii) Withholding of creditable tax at source c) Withholding of VAT d) Filing of return and payment of taxes withheld (i) Return and payment in case of government employees (ii) Statements and returns e) Final withholding tax at source Citytrust and Asianbank are domestic corporations which paid gross receipts tax and claimed a refund on the basis of a CTA ruling that the 20% FWT on a bank’s passive income does not form part of the taxable gross receipts. The 20% FWT on a bank’s interest income forms part of the taxable gross receipts because “gross receipts” means “the entire receipts without any deduction”; moreover, the imposition of the 20% FWT and 5% GRT does not constitute double taxation because GRT is a percentage tax while FWT is an income tax, and the two concepts are different from each other. (Commissioner of Internal Revenue vs.

Citytrust Investment Phils., Inc., G.R. Nos. 139786 & 140857, September 27, 2006) f) Creditable withholding tax (i) Expanded withholding tax (ii) Withholding tax on compensation g) Timing of withholding

B. Estate tax 1. Basic principles Bar Ops Pilipinas 2015 Philippine Association of Law Schools

47 2. Definition 3. Nature 4. Purpose or object 5. Time and transfer of properties Post-mortem dispositions typically – (1) Convey no title or ownership to the transferee before the death of the transferor; or, what amounts to the same thing, that the transferor should retain the ownership (full or naked) and control of the property while alive; (2) That before the [donor’s] death, the transfer should be revocable by the transferor at will, ad nutum; but revocability may be provided for indirectly by means of a reserved power in the donor to dispose of the properties conveyed; (3) That the transfer should be void if the transferor should survive the transferee; [4] [T]he specification in a deed of the causes whereby the act may be revoked by the donor indicates that the donation is inter vivos, rather than a disposition mortis causa; [5] That the designation of the donation as mortis causa, or a provision in the deed to the effect that the donation is “to take effect at the death of the donor” are not controlling criteria; such statements are to be construed together with the rest of the instrument, in order to give effect to the real intent of the transferor; and (6) That in case of doubt, the conveyance should be deemed donation inter vivos rather than mortis causa, in order to avoid uncertainty as to the ownership of the property subject of the deed. (GONZALO VILLANUEVA vs. SPOUSES FROILAN, G.R. No. 172804,

January 24, 2011)

The conveyance in question is not, first of all, one of mortis causa, which should be embodied in a will. In this case, the monies subject of savings account were in the nature of conjugal funds. In the case relied on, Rivera v. People's Bank and Trust Co., we rejected claims that a survivorship agreement purports to deliver one party's separate properties in favor of the other, but simply, their joint holdings. (ROMARICO G. VITUG vs. THE HONORABLE COURT OF

APPEALS and ROWENA FAUSTINO-CORONA, G.R. No. 82027, March 29, 1990)

But although the survivorship agreement is per se not contrary to law its operation or effect may be violative of the law. For instance, if it be shown in a given case that such agreement is a mere cloak to hide an inofficious donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced heir, it may be assailed and annulled upon such grounds.

(ROMARICO G. VITUG vs. THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINOCORONA, G.R. No. 82027, March 29, 1990) Bar Ops Pilipinas 2015 Philippine Association of Law Schools

48

6. Classification of decedent 7. Gross estate vis-à-vis net estate 8. Determination of gross estate and net estate 9. Composition of gross estate 10. Items to be included in gross estate 11. Deductions from estate As held in Propstra v. U.S., where a lien claimed against the estate was certain and enforceable on the date of the decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude the estate from deducting the entire amount of the claim for estate tax purposes. These pronouncements essentially confirm the general principle that post-death developments are not material in determining the amount of the deduction. (RAFAEL ARSENIO

S. DIZON vs. COURT OF TAX APPEALS, G.R. No. 140944, April 30, 2008)

We express our agreement with the date-of-death valuation rule. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. (RAFAEL ARSENIO S.

DIZON vs. COURT OF TAX APPEALS, G.R. No. 140944, April 30, 2008)

Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. (RAFAEL ARSENIO S. DIZON vs. COURT OF TAX

APPEALS, G.R. No. 140944, April 30, 2008)

Administration expenses, as an allowable deduction from the gross estate of the decedent for purposes of arriving at the value of the net estate, have been construed by the federal and state courts of the United States to include all expenses "essential to the collection of the assets, payment of debts or the distribution of the property to the persons entitled to it." In other words, the expenses must be essential to the proper settlement of the estate and expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No.

123206, March 22, 2000)

Thus, in Lorenzo v. Posadas, the Court construed the phrase "judicial expenses of the testamentary or intestate proceedings" as not including the compensation paid to a trustee of the decedent's estate when it appeared that such trustee was appointed for the purpose of managing the decedent's real estate for the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid on the bond filed by the administrator as an expense of administration since the giving of a bond is in the nature of a qualification for the office, and not necessary in the settlement of the estate. Neither may attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the Bar Ops Pilipinas 2015 Philippine Association of Law Schools

49 gross estate. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No.

123206, March 22, 2000)

The notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property should also be considered as a deductible administration expense as PNB provided a detailed accounting of decedent's property and gave advice as to the proper settlement of the latter's estate, acts which contributed towards the collection of decedent's assets and the subsequent settlement of the estate. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No.

123206, March 22, 2000)

12. Exclusions from estate 13. Tax credit for estate taxes paid in a foreign country 14. Exemption of certain acquisitions and transmissions 15. Filing of notice of death 16. Estate tax return C. Donor’s tax 1. Basic principles 2. Definition 3. Nature 4. Purpose or object 5. Requisites of valid donation Neither is the survivorship agreement a donation inter vivos, for obvious reasons, because it was to take effect after the death of one party. Secondly, it is not a donation between the spouses because it involved no conveyance of a spouse's own properties to the other.

(ROMARICO G. VITUG vs. THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINOCORONA, G.R. No. 82027, March 29, 1990) In the case at bar, when the spouses Vitug opened savings account, they merely put what rightfully belonged to them in a money-making venture. They did not dispose of it in favor of the other, which would have arguably been sanctionable as a prohibited donation. (ROMARICO

G. VITUG vs. THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, G.R. No. 82027, March 29, 1990) The granting clause shows that Diego donated the properties out of love and affection for the donee which is a mark of a donation inter vivos; second, the reservation of lifetime usufruct indicates that the donor intended to transfer the naked ownership over the properties; third, the donor reserved sufficient properties for his maintenance in accordance with his standing in society, indicating that the donor intended to part with the six parcels of land; lastly, the donee accepted the donation. (SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA vs. COURT

OF APPEALS, G.R. No. 111904, October 5, 2000)

In the case of Alejandro vs. Geraldez, 78 SCRA 245 (1977), we said that an acceptance clause is a mark that the donation is inter vivos. Acceptance is a requirement for donations inter vivos. Bar Ops Pilipinas 2015 Philippine Association of Law Schools

50 Donations mortis causa, being in the form of a will, are not required to be accepted by the donees during the donors' lifetime. (SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA

vs. COURT OF APPEALS, G.R. No. 111904, October 5, 2000)

Crucial in resolving whether the donation was inter vivos or mortis causa is the determination of whether the donor intended to transfer the ownership over the properties upon the execution of the deed. (SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA vs. COURT OF APPEALS,

G.R. No. 111904, October 5, 2000)

A remuneratory donation is one where the donee gives something to reward past or future services or because of future charges or burdens, when the value of said services, burdens or charges is less than the value of the donation. (De Luna v. Abrigo, G.R. No. L-57455, January 18, 1990) 6. Transfers which may be constituted as donation a) Sale/exchange/transfer of property for insufficient consideration b) Condonation/remission of debt 7. Transfer for less than adequate and full consideration 8. Classification of donor 9. Determination of gross gift 10. Composition of gross gift 11. Valuation of gifts made in property 12. Tax credit for donor’s taxes paid in a foreign country 13. Exemptions of gifts from donor’s tax 14. Person liable 15. Tax basis D. Value-Added Tax (VAT) 1. Concept As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in the chain of transactions. For simplicity and efficiency in tax collection, the VAT is imposed not just on the value added by the taxpayer, but on the entire selling price of his goods, properties or services. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION,

G.R. No. 187485, February 12, 2013)

However, the taxpayer is allowed a refund or credit on the VAT previously paid by those who sold him the inputs for his goods, properties, or services. The net effect is that the taxpayer pays the VAT only on the value that he adds to the goods, properties, or services that he actually sells. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER

CORPORATION, G.R. No. 187485, February 12, 2013)

VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit-oriented. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS,

G.R. No. 125355, March 30, 2000)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

51 The VAT is not a license tax; it is not a tax on the exercise of a privilege, much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services and the lease of properties purely for revenue purposes.

(ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995) 2. Characteristics/Elements of a VAT-Taxable transaction VAT is not a singular-minded tax on every transactional level; its assessment bears direct relevance to the taxpayer's role or link in the production chain. Hence, as affirmed by Section 99 [now Sec. 105] of the Tax Code and its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. (COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY

LINES, INC., G.R. No. 146984. July 28, 2006)

The Court rules that given the undisputed finding that the transaction in question was not made in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 [now Sec. 105] of the Tax Code, no matter how the said sale may hew to those transactions deemed sale as defined under Section 100 [now Sec. 106].

(COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES, INC., G.R. No. 146984. July 28, 2006) Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony; it was but a dole out by SIS and not in payment for goods or properties sold, bartered or exchanged by Sony. (COMMISSIONER OF INTERNAL REVENUE vs. SONY PHILIPPINES,

INC., G.R. No. 178697, November 17, 2010)

Goods or properties must be used directly or indirectly in the production or sale of taxable goods and services. (Kepco Philipppines Corp. v. CIR, G.R. No. 179356, December 14, 2009) it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R.

No. 125355, March 30, 2000) 3. Impact of tax

Under Section 105 of the Tax Code, VAT is imposed on any person who, in the course of trade or business, sells or renders services for a fee. In other words, the seller of services, who in this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway user as part of the toll fees. (RENATO V. DIAZ and AURORA MA. F. TIMBOL

vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011) 4. Incidence of tax

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

52

The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the seller's liability but merely the burden of the VAT. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE

SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in order to purchase the good, property or service. (RENATO V. DIAZ and AURORA MA. F.

TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

A seller who is directly and legally liable for the payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser of consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax. (Contex v.

CIR, G.R. No. 151135, July 2, 2004)

In the case of the VAT, the law minimizes the regressive effects of indirect taxation by providing for zero rating of certain transactions, while granting exemptions to other transactions. On the other hand, the transactions which are subject to the VAT are those which involve goods and services which are used or availed of mainly by higher income groups. (ARTURO M. TOLENTINO

v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995) 5. Tax credit method 6. Destination principle

According to the Destination Principle, goods and services are taxed only in the country where these are consumed. In connection with the said principle, the Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT, while those destined for use or consumption within the Philippines shall be imposed with 10% VAT. (ATLAS CONSOLIDATED

MINING AND DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. Nos. 141104 & 148763, June 8, 2007) Applying the destination principle to the exportation of goods, automatic zero rating is primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes that are attributable to export sales. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE

TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

Under the cross-border principle of the VAT system being enforced by the Bureau of Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory — except specifically declared areas — to an Bar Ops Pilipinas 2015 Philippine Association of Law Schools

53 ecozone. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES),

G.R. No. 153866, February 11, 2005)

While an ecozone is geographically within the Philippines, it is deemed a separate customs territory and is regulated in laws as foreign soul. Sales by supplies outside the borders of ecozone to this separate customs territory are deemed exports and treated as export sales.

(CIR v. Seksui Jushi Phils, Inc. G.R. No. 149671, July 21, 2006)

For as long as the goods remain within the zone, whether we call it an economic zone or a freeport zone, for as long as we say in this law that all goods entering this particular territory will be duty-free and tax-free, for as long as they remain there, consumed there or re-exported or destroyed in that place, then they are not subject to duties and taxes in accordance with the laws of the Philippines. (Coconut Oil Refiners Association v. Executive Secretary, G.R. No.

132527, July 29, 2005)

7. Persons liable 8. VAT on sale of goods or properties Goods, as commonly understood in the business sense, refer to the product which the VATregistered person offers for sale to the public. With respect to real estate dealers, it is the real properties themselves which constitute their goods. Such real properties are the operating assets of the real estate dealer. (Fort Bonifacio Development Corporation vs. CIR, G.R. Nos.

158885 and 170630, April 2, 2009)

a) Requisites of taxability of sale of goods or properties Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction. However, it does not follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code would show that a transaction "in the course of trade or business" includes "transactions incidental thereto." (MINDANAO II

GEOTHERMAL PARTNERSHIP vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 193301, March 11, 2013)

Prior to the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable for VAT. (MINDANAO II GEOTHERMAL

PARTNERSHIP vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 193301, March 11, 2013)

9. Zero-rated sales of goods or properties, and effectively zero-rated sales of goods or properties Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at zero and when applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R.

No. 153866, February 11, 2005)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

54 Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate. Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. (COMMISSIONER OF INTERNAL

REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

If respondent is located in an export processing zone within that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be viewed as constructively exported under EO 226. Considered as export sales, such purchase transactions by respondent would indeed be subject to a zero rate. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE

TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

PAGCOR's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation. Acesite sought the refund of the amount it paid as VAT on the ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that PAGCOR and Acesite were both exempt from paying VAT. (PHILIPPINE

AMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THE BUREAU OF INTERNAL REVENUE, G.R. No. 172087, March 15, 2011)

No prior application for the effective zero rating of its transactions is necessary. The BIR regulations additionally requiring an approved prior application for effective zero rating cannot prevail over the clear VAT nature of respondent's transactions. Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayer's transactions to be considered effectively zero-rated. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE

TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

The Omnibus Investments Code of 1987 recognizes as export sales the sales of export products to another producer or to an export trader, provided that the export products are actually exported. For purposes of VAT zero-rating, such producer or export trader must be registered with the BOI and is required to actually export more than 70% of its annual production. (ATLAS

CONSOLIDATED MINING AND DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. Nos. 141104 & 148763, June 8, 2007)

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results from either one of them is not. In both instances of zero rating, there is total relief for the purchaser from the burden of the tax but in an exemption there is only partial relief, because the purchaser is not allowed any tax refund of or credit for input taxes paid. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES),

G.R. No. 153866, February 11, 2005)

10. Transactions deemed sale a) Transfer, use or consumption not in the course of business of goods/properties originally intended for sale or use in the course of business b) Distribution or transfer to shareholders, investors or creditors Bar Ops Pilipinas 2015 Philippine Association of Law Schools

55 c) Consignment of goods if actual sale not made within 60 days from date of consignment d) Retirement from or cessation of business with respect to inventories on hand 11. Change or cessation of status as VAT-registered person a) Subject to VAT (i) Change of business activity from VAT taxable status to VAT-exempt status (ii) Approval of request for cancellation of a registration due to reversion to exempt status (iii) Approval of request for cancellation of registration due to desire to revert to exempt status after lapse of 3 consecutive years b) Not subject to VAT (i) Change of control of a corporation (ii) Change in the trade or corporate name (iii) Merger or consolidation of corporations 12. VAT on importation of goods a) Transfer of goods by tax exempt persons 13. VAT on sale of service and use or lease of properties Service has been defined as the art of doing something useful for a person or company for a fee or useful labor or work rendered or to be rendered another for a fee. (CIR v. American Express International, Inc., G.R. No. 152609, June 29, 2005) By qualifying "services" with the words "all kinds," Congress has given the term "services" an all-encompassing meaning. The listing of specific services are intended to illustrate how pervasive and broad is the VAT's reach rather than establish concrete limits to its application; thus, every activity that can be imagined as a form of "service" rendered for a fee should be deemed included unless some provision of law especially excludes it. (RENATO V. DIAZ and

AURORA MA. F. TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

Tollway operators not only come under the broad term "all kinds of services," they also come under the specific class described in Section 108 as "all other franchise grantees" who are subject to VAT, "except those under Section 119 of this Code." Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio and/or television broadcasting companies with gross annual incomes of less than P10 million and gas and water utilities) that Section 119 spares from the payment of VAT. (RENATO V. DIAZ and AURORA MA.

F. TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

In specifically including by way of example electric utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered businesses, Section 108 opens other companies rendering public service for a fee to the imposition of VAT. Businesses of a public nature such as public utilities and the collection of tolls or charges for its use or service is a franchise. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE SECRETARY OF FINANCE,

G.R. No. 193007, July 19, 2011)

In the case of CIR v. Court of Appeals (CA), the Court had the occasion to rule that services rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. In that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which means that it was paid the cost or Bar Ops Pilipinas 2015 Philippine Association of Law Schools

56 expense that it incurred although without profit. (COMMISSIONER OF INTERNAL REVENUE vs.

SONY PHILIPPINES, INC., G.R. No. 178697, November 17, 2010)

Among those included in the enumeration is the “lease of motion picture films, films, tapes and discs.” This, however, is not the same as the showing or exhibition of motion pictures or films. The legislative intent is not to impose VAT on persons already covered by the amusement tax and this holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was intended to replace the percentage tax on certain services. (CIR v. SM Prime Holdings,

Inc. and First Asia Realty Development Corp., G.R. No. 183505, February 26, 2010) a) Requisites for taxability 14. Zero-rated sale of services 15. VAT exempt transactions

An exempt transaction involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status — VAT-exempt or not — of the party to the transaction. Indeed, such transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R.

No. 153866, February 11, 2005)

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT. Such party is also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer. (COMMISSIONER OF INTERNAL

REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005) a) VAT exempt transactions, in general

By extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes. (PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) vs.

THE BUREAU OF INTERNAL REVENUE, G.R. No. 172087, March 15, 2011)

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption of the World Health Organization (WHO) upon an international agreement was upheld. We held in said case that the exemption of contractee WHO should be implemented to mean that the entity or person exempt is the contractor itself who constructed the building owned by contractee WHO, and such does not violate the rule that tax exemptions are personal because the manifest intention of the agreement is to exempt the contractor so that no contractor's tax may be shifted to the contractee WHO. (PHILIPPINE Bar Ops Pilipinas 2015 Philippine Association of Law Schools

57

AMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THE BUREAU OF INTERNAL REVENUE, G.R. No. 172087, March 15, 2011) Pawnshops- considered as non-bank financial intermediary is exempted from VAT but liable to percentage tax. (Tambunting Pawnshop, Inc. v. CIR, G.R. No. 179085, January 21, 2010) b) Exempt transaction, enumerated 16. Input tax and output tax, defined Under the present method that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R.

No. 153866, February 11, 2005)

If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. (COMMISSIONER OF INTERNAL REVENUE vs.

SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

17. Sources of input tax a) Purchase or importation of goods b) Purchase of real properties for which a VAT has actually been paid c) Purchase of services in which VAT has actually been paid d) Transactions deemed sale e) Presumptive input f) Transitional input Prior payment of taxes is not necessary before a taxpayer could avail of the 8% transitional input tax credit: first, it was never mentioned in Section 105 of the old NIRC [now Sec. 111] that prior payment of taxes is a requirement; second, since the law (Section 105 of the NIRC) does not provide for prior payment of taxes, to require it now would be tantamount to judicial legislation which, to state the obvious, is not allowed; third, a transitional input tax credit is not a tax refund per se but a tax credit; fourth, if the intent of the law were to limit the input tax to cases where actual VAT was paid, it could have simply said that the tax base shall be the actual value-added tax paid; and fifth, this Court had already declared that prior payment of taxes is not required in order to avail of a tax credit. (FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, January 22, 2013) Section 112 of the Tax Code does not prohibit cash refund or tax credit of transitional input tax in the case of zero-rated or effectively zero-rated VAT registered taxpayers, who do not have any output VAT. The phrase "except transitional input tax" in Section 112 of the Tax Code was inserted to distinguish creditable input tax from transitional input tax credit. (FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425,

January 22, 2013)

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to VAT Bar Ops Pilipinas 2015 Philippine Association of Law Schools

58 status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. (FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL

REVENUE, G.R. No. 173425, January 22, 2013)

18. Persons who can avail of input tax credit In a VAT-exempt transaction, the seller is not allowed to charge VAT to his customer. Since no output tax is shifted by the seller, there is no output tax against which the related input taxes may be credited. Neither can he credit this input tax against the VAT due on other sales. In this case, he is treated as the end user who will shoulder the cost of the input VAT.

(COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013) Unlike the input taxes related to exempt sales, input taxes related to zero-rated sales may be credited against output taxes on other sales and in case it is not fully utilized, the excess may be carried over to the succeeding quarter or quarters and there is no prescription period for the carry-over. The law gives the taxpayer another option for the recovery of used input taxes: application for refund or tax credit certificate. (COMMISSIONER OF INTERNAL REVENUE vs.

SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013)

19. Determination of output/input tax; VAT payable; excess input tax credits a) Determination of output tax b) Determination of input tax creditable c) Allocation of input tax on mixed transactions d) Determination of the output tax and VAT payable and computation of VAT payable or excess tax credits 20. Substantiation of input tax credits 21. Refund or tax credit of excess input tax If, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES),

G.R. No. 153866, February 11, 2005)

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. (FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, January 22, 2013) As regards Section 110, while the law only provides for a tax credit, a taxpayer who erroneously or excessively pays his output tax is still entitled to recover the payments he made either as a tax credit or a tax refund. In this case, since petitioner still has available transitional input tax credit, it filed a claim for refund to recover the output VAT it erroneously or excessively paid for the 1st quarter of 1997. Thus, there is no reason for denying its claim for tax refund/credit. (FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL

REVENUE, G.R. No. 173425, January 22, 2013)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

59 Even if the law does not expressly state that the Ironcon’s excess creditable VAT withheld is refundable, it may be the subject-of a claim for refund as an erroneously collected tax under Sec. 204 (C) and 229 of the NIRC. It should be clarified that this ruling only refers to creditable VAT withheld pursuant to Sec. 114 of the NIRC prior to its amendment. After its amendment by R.A. 9337, the amount withheld under Sec. 114 of the NIRC is now treated as final VAT, no longer under the creditable withholding tax system (CIR v. Ironcon Builders and Development Corp., G.R. No. 180042, February 8, 2010) The input VAT is not "excessively" collected as understood under Section 229 because at the time the input VAT is collected the amount paid is correct and proper. The person legally liable for the input VAT cannot claim that he overpaid the input VAT by the mere existence of an "excess" input VAT. The term "excess" input VAT simply means that the input VAT available as credit exceeds the output VAT, not that the input VAT is excessively collected because it is more than what is legally due. Thus, the taxpayer who legally paid the input VAT cannot claim for refund or credit of the input VAT as "excessively" collected under Section 229.

(COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013)

If such "excess" input VAT is an "excessively" collected tax, the taxpayer should be able to seek a refund or credit for such "excess" input VAT whether or not he has output VAT. The VAT System does not allow such refund or credit and such "excess" input VAT is not an "excessively" collected tax under Section 229. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE

POWER CORPORATION, G.R. No. 187485, February 12, 2013)

a) Who may claim for refund/apply for issuance of tax credit certificate Having determined that respondent's purchase transactions are subject to a zero VAT rate, the tax refund or credit is in order. To repeat, the VAT is a tax imposed on consumption, not on business. Although respondent as an entity is exempt, the transactions it enters into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE

TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

b) Period to file claim/apply for issuance of tax credit certificate The Court, in San Roque, ruled that equitable estoppel had set in when respondent issued BIR Ruling No. DA-489-03 which was a general interpretative rule, which effectively misled all taxpayers into filing premature judicial claims with the CTA. Thus, taxpayers could rely on the ruling from its issuance on 10 December 2003 up to its reversal on 6 October 2010, when CIR v. Aichi Forging Company of Asia, lnc. was promulgated. (PROCTER & GAMBLE ASIA PTE LTD.

vs.COMMISSIONER OF INTERNAL REVENUE, G.R. No. 202071, February 19, 2014)

In a nutshell, the rules on the determination of the prescriptive period for filing a tax refund or credit of unutilized input VAT, as provided in Section 112 of the Tax Code, are as follows: (1) An administrative claim must be filed with the CIR within two years after the close of the taxable quarter when the zero-rated or effectively zero-rated sales were made.

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

60 (2) The CIR has 120 days from the date of submission of complete documents in support of the administrative claim within which to decide whether to grant a refund or issue a tax credit certificate. The 120-day period may extend beyond the two-year period from the filing of the administrative claim if the claim is filed in the later part of the two-year period. If the 120-day period expires without any decision from the CIR, then the administrative claim may be considered to be denied by inaction. (3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s decision denying the administrative claim or from the expiration of the 120-day period without any action from the CIR. (4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an exception to the mandatory and jurisdictional 120+30 day periods.

(COMMISSIONER OF INTERNAL REVENUE vs.TOLEDO POWER, INC., G.R. No. 183880, January 20, 2014) The lessons of this case may be summed up as follows: A. Two-Year Prescriptive Period

1. It is only the administrative claim that must be filed within the two-year prescriptive period. (Aichi) 2. The proper reckoning date for the two-year prescriptive period is the close of the taxable quarter when the relevant sales were made. (San Roque) 3. The only other rule is the Atlas ruling, which applied only from 8 June 2007 to 12 September 2008. Atlas states that the two-year prescriptive period for filing a claim for tax refund or credit of unutilized input VAT payments should be counted from the date of filing of the VAT return and payment of the tax. (San Roque) B. 120+30 Day Period 1. The taxpayer can file an appeal in one of two ways: (1) file the judicial claim within thirty days after the Commissioner denies the claim within the 120-day period, or (2) file the judicial claim within thirty days from the expiration of the 120-day period if the Commissioner does not act within the 120-day period. 2. The 30-day period always applies, whether there is a denial or inaction on the part of the CIR. 3. As a general rule, the 3 0-day period to appeal is both mandatory and jurisdictional. (Aichi and San Roque) 4. As an exception to the general rule, premature filing is allowed only if filed between Bar Ops Pilipinas 2015 Philippine Association of Law Schools

61 10 December 2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was still in force. (San Roque) 5. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-48903 was in force. (San Roque) (COMMISSIONER OF INTERNAL REVENUE vs. MINDANAO

II GEOTHERMAL PARTNERSHIP, G.R. No. 191498, January 15, 2014)

It is indisputable that compliance with the 120-day waiting period is mandatory and jurisdictional. Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the doctrine of exhaustion of administrative remedies and renders the petition premature and thus without a cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayer’s petition. (MINDANAO II GEOTHERMAL PARTNERSHIP vs.

COMMISSIONER OF INTERNAL REVENUE, G.R. No. 193301, March 11, 2013)

Stated otherwise, the two-year prescriptive period does not refer to the filing of the judicial claim with the CTA but to the filing of the administrative claim with the Commissioner. As held in Aichi, the "phrase ‘within two years x x x apply for the issuance of a tax credit or refund’ refers to applications for refund/credit with the CIR and not to appeals made to the CTA."

(MINDANAO II GEOTHERMAL PARTNERSHIP vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 193301, March 11, 2013) San Roque's failure to comply with the 120-day mandatory period renders its petition for review with the CTA void as Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity." San Roque's void petition for review cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be legitimized "except when the law itself authorizes [its] validity," and there is no law authorizing the petition's validity. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER

CORPORATION, G.R. No. 187485, February 12, 2013)

Sec. 112(A) clearly provides in no uncertain terms that unutilized input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed within two years reckoned from the close of the taxable quarter when the relevant sales were made pertaining to the input VAT regardless of whether said tax was paid or not. The reckoning frame would always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid. (COMMISSIONER OF

INTERNAL REVENUE vs. MIRANT PAGBILAO CORPORATION, G.R. No. 172129. September 12, 2008)

This prescriptive period has no relation to the date of payment of the "excess" input VAT since the "excess" input VAT may have been paid for more than two years but this does not bar the filing of a judicial claim for "excess" VAT under Section 112 (A), which has a different reckoning period from Section 229. Moreover, the person claiming the refund or credit of the input VAT is not the person who legally paid the input VAT. (COMMISSIONER OF INTERNAL REVENUE vs.

SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013)

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62 The mere filing by a taxpayer of a judicial claim with the CTA before the expiration of the 120day period cannot operate to divest the Commissioner of his jurisdiction to decide an administrative claim within the 120-day mandatory period, unless the Commissioner has clearly given cause for equitable estoppel to apply as expressly recognized in Section 246 of the Tax Code. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R.

No. 187485, February 12, 2013)

Because the 120+30 day period is jurisdictional, the issue of whether petitioner complied with the said time frame may be broached at any stage, even on appeal. (NIPPON EXPRESS

(PHILIPPINES) CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 196907, March 13, 2013) c) Manner of giving refund d) Destination principle or cross-border doctrine 22. Invoicing requirements For a judicial claim for refund to prosper, however, respondent must not only prove that it is a VAT registered entity and that it filed its claims within the prescriptive period. It must substantiate the input VAT paid by purchase invoices or official receipts: 1) A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the prices charged therefor or a list by whatever name it is known which is used in the ordinary course of business evidencing sale and transfer or agreement to sell or transfer goods and services; and 2) A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other settlement between seller and buyer of goods, debtor or creditor, or person rendering services and client or customer. (ATLAS CONSOLIDATED MINING AND

DEVELOPMENT CORPORATION vs. Nos. 141104 & 148763, June 8, 2007)

COMMISSIONER

OF

INTERNAL

REVENUE,

G.R.

a) Invoicing requirements in general The requisite that the receipt be issued showing the name, business style, if any, and address of the purchaser, customer or client is precise so that when the books of accounts are subjected to a tax audit examination, all entries therein could be shown as adequately supported and proven as legitimate business transactions. The absence of official receipts issued in the taxpayer's name is tantamount to non-compliance with the substantiation requirements provided by law. (BONIFACIO WATER CORPORATION (formerly BONIFACIO VIVENDI WATER

CORPORATION) vs. THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 175142, July 22, 2013)

Taxpayers claiming for a refund or tax credit certificate must comply with the strict and mandatory invoicing and accounting requirements provided under the 1997 NIRC, as amended, and its implementing rules and regulations. Thus, the change of petitioner's name to "Bonifacio GDE Water Corporation," being unauthorized and without approval of the SEC, and the issuance of official receipts under that name which were presented to support petitioner's claim for tax refund, cannot be used to allow the grant of tax refund or issuance of a tax credit certificate in petitioner's favor. (BONIFACIO WATER CORPORATION (formerly BONIFACIO VIVENDI WATER

CORPORATION) vs. THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 175142, July 22, 2013) Bar Ops Pilipinas 2015 Philippine Association of Law Schools

63

Failure to print the word “zero-rated” on the invoices or receipts is fatal to a claim for credit of refund of input VAT on zero-rated sales (J.R.A. Philippines, Inc. v. CIR, G.R. No. 177127, October 11, 2010) If the claim for refund/ tax credit certificate is based on the existence of zero-rated sales by the taxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices (e.g. failure to indicate the TIN), its claim for tax credit/refund of VAT on its purchases shall be denied considering that the invoice it is issuing to its customers does not depict its being a VATregistered taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment is without prejudice to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset account subject to depreciation, whichever is applicable (Panasonic Comm. Imaging Corp. of the Phil. v. CIR, G.R. No. 178090, February 8, 2010) b) Invoicing and recording deemed sale transactions c) Consequences of issuing erroneous VAT invoice or VAT official receipt 23. Filing of return and payment 24. Withholding of final VAT on sales to government

TAX REMEDIES UNDER THE NIRC a) Assessment An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and protests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the Court of Tax Appeals. (CIR vs Pascor Realty and Development Corp., GR no. 128315, June 29, 1999) (i) Concept of assessment (a) Requisites for valid assessment (b) Constructive methods of income determination The rule is that in the absence of the accounting records of a taxpayer, his tax liability may be determined by estimation. The petitioner is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of the taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to proof. However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously. In fine, then, the petitioner acted arbitrarily and capriciously in relying on and giving weight to the machine copies of the Consumption Entries in fixing the tax deficiency assessments against the respondent. (CIR vs Hantex Trading Co., GR no. 136975, March 31, 2005) The "best evidence" envisaged in Section 16 of the 1977 NIRC [now Sec. 6, 1997 NIRC], as amended, includes the corporate and accounting Bar Ops Pilipinas 2015 Philippine Association of Law Schools

64 records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales. The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no limit or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose of the law is to enable the BIR to get at the taxpayer’s records in whatever form they may be kept. Such records include computer tapes of the said records prepared by the taxpayer in the course of business.68 In this era of developing information-storage technology, there is no valid reason to immunize companies with computer-based, record-keeping capabilities from BIR scrutiny. The standard is not the form of the record but where it might shed light on the accuracy of the taxpayer’s return. However, the best evidence obtainable under Section 16 of the 1977 NIRC [now Sec. 6, 1997 NIRC], as amended, does not include mere photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. (CIR vs Hantex Trading Co., GR no. 136975, March 31, 2005) (c) Inventory method for income determination (d) Jeopardy assessment (e) Tax delinquency and tax deficiency (ii) Power of the Commissioner to make assessments and prescribe additional requirements for tax administration and enforcement (a) Power of the Commissioner to obtain information, and to summon/examine, and take testimony of persons For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed. Sec. 15 of the NIRC, on the other hand, provides that "[w]hen 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 law or regulation, or when there is reason to believe that any such report is false, incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax on the best evidence obtainable." Clearly, Section 15 does not provide an exception to the statute of limitations on the issuance of an assessment, by allowing the initial assessment to be made on the basis of the best evidence available. Having made its initial assessment in the manner prescribed, the commissioner could not have been authorized to issue, beyond the five-year prescriptive period, the second and the third assessments under consideration before us. (CIR vs BF Goodrich Phils., Inc., GR no. 104171, February 24, 1999) (iii) When assessment is made Bar Ops Pilipinas 2015 Philippine Association of Law Schools

65 An assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer. (CIR vs Pascor Realty and Development Corp., GR no. 128315, June 29, 1999) (a) Prescriptive period for assessment The statute of limitations on assessment and collection of taxes is for the protection of the taxpayer and, thus, shall be construed liberally in his favor. Though the statute of limitations on assessment and collection of national internal revenue taxes benefits both the Government and the taxpayer, it principally intends to afford protection to the taxpayer against unreasonable investigation. The indefinite extension of the period for assessment is unreasonable because it deprives the said taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. (BPI vs CIR, GR 139736, October 17, 2005) Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of 1987 deal with the same subject matter — the computation of legal periods. Under the Civil Code, a year is equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of 1987, however, a year is composed of 12 calendar months. Needless to state, under the Administrative Code of 1987, the number of days is irrelevant. There obviously exists a manifest incompatibility in the manner of computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason, we hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law, governs the computation of legal periods. (CIR vs Primetown Property Group Inc., GR 162155, August 28, 2007) Considering that the deficiency assessment was based on the amended return which, as aforestated, is substantially different from the original return, the period of limitation of the right to issue the same should be counted from the filing of the amended income tax return. We believe that to hold otherwise, we would be paving the way for taxpayers to evade the payment of taxes by simply reporting in their original return heavy losses and amending the same more than five years later when the Commissioner of Internal Revenue has lost his authority to assess the proper tax thereunder. The object of the Tax Code is to impose taxes for the needs of the Government, not to enhance tax avoidance to its prejudice. (CIR vs Phoenix Assurance Co., L-19127, May 20, 1965) A waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the taxpayers’ right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. The waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription as erroneously held by the Court of Appeals. It is an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain. The waiver does not mean that the taxpayer relinquishes the right to Bar Ops Pilipinas 2015 Philippine Association of Law Schools

66 invoke prescription unequivocally particularly where the language of the document is equivocal. The Waiver of Statute of Limitations, signed by petitioner’s comptroller on September 22, 1997 is not valid and binding because it does not conform with the provisions of RMO No. 20-90. It did not specify a definite agreed date between the BIR and petitioner, within which the former may assess and collect revenue taxes. Thus, petitioner’s waiver became unlimited in time, violating Section 222(b) of the NIRC. (Philippine Journalists, Inc vs CIR, GR 162852, December 16, 2004) The waiver required under the Tax Code is one which is not unilateral nor can it be said that concurrence to such agreement is a mere formality because it is the very signatures of both the Commissioner and the taxpayer which give birth to such valid agreement. (CIR v. CA, G.R. 115712, Feb. 25, 1999) A waiver of the statute of limitations being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations must be carefully and strictly construed. (CIR v. FMF Dev’t Corp., 556 SCRA 698) The requirement to furnish the taxpayer a copy of the waiver of the Statute of Limitations is not only to give notice of the existence of the document but of the acceptance by the BIR and the perfection of the agreement. (Phil. Journalists, Inc. v. CIR, GR 162852, Dec. 16, 2004) (1) False, fraudulent, and non-filing of returns Petitioner insists that private respondent committed "falsity" when it sold the property for a price lesser than its declared fair market value. This fact alone did not constitute a false return which contains wrong information due to mistake, carelessness or ignorance. 13 It is possible that real property may be sold for less than adequate consideration for a bona fide business purpose; in such event, the sale remains an "arm's length" transaction. In the present case, the private respondent was compelled to sell the property even at a price less than its market value, because it would have lost all ownership rights over it upon the expiration of the parity amendment. (CIR vs BF Goodrich Phils., Inc., GR no.

104171, February 24, 1999)

Fraud cannot be presumed but must be proven. As a corollary thereto, we can also state that fraudulent intent could not be deduced from mistakes however frequent they may be, especially if such mistakes emanate from erroneous entries or erroneous classification of items in accounting methods utilized for determination of tax liabilities. The lower court's conclusion regarding the existence of fraudulent intent to evade payment of taxes was based merely on a presumption and not on evidence establishing a willful filing of false and fraudulent returns so as to warrant the imposition of the fraud penalty. The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to Bar Ops Pilipinas 2015 Philippine Association of Law Schools

67 induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by the law. (Aznar vs CTA, GR L-20569, August 23, 1974) (b) Suspension of running of statute of limitations Petitioners also argue that the government’s right to assess and collect the subject tax had prescribed. Petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the pool changed its address, for they stated that the pool’s information return filed in 1980 indicated therein its “present address.” The Court finds that this falls short of the requirement of Section 333 [now section 223] of the NIRC for the suspension of the prescriptive period. The law clearly states that the said period will be suspended only “if the taxpayer informs the Commissioner of Internal Revenue of any change in the address.” (Afisco Insurance vs CA, GR 112675, January 25, 1999) Sec. 271 [1977 NIRC] (now Sec. 223 of 1997 NIRC) limits the suspension of the running of prescription to instances when reinvestigation is requested by a taxpayer and is granted by the CIR. Only a request for reinvestigation can toll the running of the period of the statute of limitations because it would entail reception and evaluation of additional evidence and will take more time than a request for reconsideration where the evaluation of the evidence is limited only to the evidence already at hand. (CIR v. Phil. Global Communications, 506 SCRA 427) (iv) General provisions on additions to the tax (a) Civil penalties (b) Interest (c) Compromise penalties It does not appear that petitioner accepted the imposition of the compromise amounts. It is now a well settled doctrine that compromise penalty cannot be imposed or collected without the agreement or conformity of the taxpayer. (Wonder Mechanical Engineering vs CTA, GR L-22805 & L-27858, June 30, 1975) (v) Assessment process (a) Tax audit (b) Notice of informal conference Under Rev. Reg. 12-99, a notice of informal conference is sent to the taxpayer informing him of the findings of the audit conducted on his books and records indicating that there is a discrepancy in his tax payments which has to be paid. However under Rev. Reg. 18-2013 dated Nov. 28, 2013 the requirement for the issuance of a letter of informal conference has been removed. (c) Issuance of preliminary assessment notice Sec. 228 of the Tax Code clearly requires that the taxpayer must be informed that he is liable for deficiency taxes through the sending of a Preliminary Bar Ops Pilipinas 2015 Philippine Association of Law Schools

68 Assessment Notice. The sending of a PAN to the taxpayer is to inform him of the assessment made is but part of due process requirement in the issuance of a deficiency tax assessment, the absence of which renders nugatory any assessment made by the tax authorities. (CIR v. Metro Star Superama, Inc. 637 SCRA 633) (d) Notice of informal conference [ is this same as (b) above?] (e) Issuance of preliminary assessment notice [ is this same as (c)?] (f) Exceptions to issuance of preliminary assessment notice (g) Reply to preliminary assessment notice (h) Issuance of formal letter of demand and assessment notice/final assessment notice Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments. (Sy Po vs CTA, GR 81446, August 18, 1988) An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. Hence, assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be. In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. (CIR vs Island Garment Manufacturing Co., GR L-46644, September 11, 1987) Taxpayers shall be informed in writing of the law and the facts on which the assessment is made, otherwise, the assessment shall be void. The old requirement of merely notifying the taxpayer of the CIR’s findings was changed in 1998 to inform the taxpayer of not only the law but also the facts on which an assessment would be made. Failure to comply with Sec. 228 of the Tax Code does not only render the assessment void, but also finds no validation in any provision in the Tax Code. (CIR vs. Reyes, 480 SCRA 382) A taxpayer must be informed in writing of the legal and factual bases of the tax assessment made against him. This is a mandatory requirement. The advice of a tax deficiency given by the CIR to an employee of Enron as well as the preliminary 5-day letter notice, were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment. Sec. 228 of the NIRC requires that the legal and factual bases be stated in the formal letter of demand and assessment notice. Otherwise the law and RR 12-99 would be rendered nugatory. In view of the absence of a fair opportunity for Enron to be informed of the bases of the assessment, the assessment was void. This is a requirement of due process. (CIR v. Enron Subic Power Corp. 575 SCRA 212) (i) Disputed assessment (j) Administrative decision on a disputed assessment Bar Ops Pilipinas 2015 Philippine Association of Law Schools

69 The authority to make tax assessments may be delegated to subordinate officers. Said assessment has the same force and effect as that issued by the Commissioner himself, if not reviewed or revised by the latter. (Oceanic Network Wireless Inc., GR 148380, December 9, 2005) (vi) Protesting assessment (a) Protest of assessment by taxpayer (1) Protested assessment (2) When to file a protest (3) Forms of protest This Court had consistently ruled in a number of cases that a request for reconsideration or reinvestigation by the taxpayer, without a valid waiver of the prescriptive periods for the assessment and collection of tax, as required by the Tax Code and implementing rules, will not suspend the running thereof. (BPI vs CIR, GR 139736, October 17, 2005) It bears to emphasize that under Section 224 of the Tax Code of 1977, as amended, the running of the prescriptive period for collection of taxes can only be suspended by a request for reinvestigation, not a request for reconsideration. Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment, which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter can not. (BPI vs CIR, GR 139736, October 17, 2005) (4) Content and validity of protest (b) Submission of documents within 60 days from filing of protest Petitioner cannot insist on the submission of proof of DST payment because such document does not exist as respondent claims that it is not liable to pay, and has not paid, the DST on the deposit on subscription. The term “relevant supporting documents” should be understood as those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents. The BIR cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit. (CIR vs First Express Pawnshop Company, GR 172045-46, June 16, 2009) (c) Effect of failure to protest The rule is that for the Court of Tax Appeals to acquire jurisdiction, an assessment must first be disputed by the taxpayer and ruled upon by the Commissioner of Internal Revenue to warrant a decision from which a petition for review may be taken to the Court of Tax Appeals. Where an adverse ruling has been rendered by the Commissioner of Internal Revenue with reference to a disputed assessment or a claim for refund or credit, the taxpayer may appeal the same within thirty (30) days after receipt thereof. A request for reconsideration Bar Ops Pilipinas 2015 Philippine Association of Law Schools

70 must be made within thirty (30) days from the taxpayer’s receipt of the tax deficiency assessment, otherwise, the decision becomes final, unappealable and therefore, demandable. A tax assessment that has become final, executory and enforceable for failure of the taxpayer to assail the same as provided in Section 228 can no longer be contested. (Oceanic Network Wireless Inc., GR

148380, December 9, 2005)

(d) Period provided for the protest to be acted upon (vii) Rendition of decision by Commissioner (a) Denial of protest Records show that petitioner disputed the PAN but not the Formal Letter of Demand with Assessment Notices. Nevertheless, we cannot blame petitioner for not filing a protest against the Formal Letter of Demand with Assessment Notices since the language used and the tenor of the demand letter indicate that it is the final decision of the respondent on the matter. We have time and again reminded the CIR to indicate, in a clear and unequivocal language, whether his action on a disputed assessment constitutes his final determination thereon in order for the taxpayer concerned to determine when his or her right to appeal to the tax court accrues. Viewed in the light of the foregoing, respondent is now estopped from claiming that he did not intend the Formal Letter of Demand with Assessment Notices to be a final decision. (Allied Banking Corporation vs CIR, G.R. No. 175097, February 5, 2010) (1) Commissioner’s actions equivalent to denial of protest The request for reinvestigation and reconsideration was in effect considered denied by petitioner when the latter filed a civil suit for collection of deficiency income. Under the circumstances, the Commissioner of Internal Revenue, not having clearly signified his final action on the disputed assessment, legally the period to appeal has not commenced to run. Thus, it was only when private respondent received the summons on the civil suit for collection of deficiency income on December 28, 1978 that the period to appeal commenced to run. (CIR vs Union Shipping Corporation, GR L-66160, May 21, 1990) The letter of February 18, 1963, in the view of the Court, is tantamount to a denial of the reconsideration or protest of the respondent corporation on the assessment made by the petitioner, considering that the said letter is in itself a reiteration of the demand by the Bureau of Internal Revenue for the settlement of the assessment already made, and for the immediate payment of the sum of P758, 687.04 in spite of the vehement protest of the respondent corporation on April 21, 1961. This certainly is a clear indication of the firm stand of petitioner against the reconsideration of the disputed assessment in view of the continued refusal of the respondent corporation to execute the waiver of the period of limitation upon the assessment in question. (CIR vs Ayala Securities Corp., GR L29485, March 31, 1976)

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71 (a) Filing of criminal action against taxpayer (b) Issuing a warrant of distraint and levy (2) Inaction by Commissioner (viii) Remedies of taxpayer to action by Commissioner (a) In case of denial of protest (b) In case of inaction by Commissioner within 180 days from submission of documents In case the Commissioner failed to act on the disputed assessment within the 180-day period from date of submission of documents, a taxpayer can either: (1) file a petition for review with the Court of Tax Appeals within 30 days after the expiration of the 180-day period; or (2) await the final decision of the Commissioner on the disputed assessments and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such decision. (RCBC vs CIR, G.R. No. 168498, April 24, 2007) (c) Effect of failure to appeal b) Collection (i) Requisites (ii) Prescriptive periods The BIR has three years, counted from the date of actual filing of the return or from the last date prescribed by law for the filing of such return, whichever comes later, to assess a national internal revenue tax or to begin a court proceeding for the collection thereof without an assessment. In case of a false or fraudulent return with intent to evade tax or the failure to file any return at all, the prescriptive period for assessment of the tax due shall be 10 years from discovery by the BIR of the falsity, fraud, or omission. When the BIR validly issues an assessment, within either the three-year or ten-year period, whichever is appropriate, then the BIR has another three years [now 5 years under Sec. 222, 1997 NIRC] after the assessment within which to collect the national internal revenue tax due thereon by distraint, levy, and/or court proceeding. (BPI vs CIR, GR 139736, October 17, 2005) Under Section 223(c) of the Tax Code of 1977, as amended, it is not essential that the Warrant of Distraint and/or Levy be fully executed so that it can suspend the running of the statute of limitations on the collection of the tax. It is enough that the proceedings have validly began or commenced and that their execution has not been suspended by reason of the voluntary desistance of the respondent BIR Commissioner. Existing jurisprudence establishes that distraint and levy proceedings are validly begun or commenced by the issuance of the Warrant and service thereof on the taxpayer. It is only logical to require that the Warrant of Distraint and/or Levy be, at the very least, served upon the taxpayer in order to suspend the running of the prescriptive period for collection of an assessed tax, because it may only be upon the service of the Warrant that the taxpayer is informed of the denial by the BIR of any pending protest of the said taxpayer, and the resolute intention of the BIR to collect the tax assessed. (BPI vs CIR, GR 139736, October 17, 2005)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

72 While we may agree with the Court of Tax Appeals that a mere request for reexamination or reinvestigation may not have the effect of suspending the running of the period of limitation for in such case there is need of a written agreement to extend the period between the Collector and the taxpayer, there are cases however where a taxpayer may be prevented from setting up the defense of prescription even if he has not previously waived it in writing as when by his repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government. (CIR vs Kudos Metal Corp., GR 178087, May 5, 2010) The running of the prescription period where the acts of the taxpayer did not prevent the government from collecting the tax. Partial payment would not prevent the government from suing the taxpayer. Because, by such act of payment, the government is not thereby “persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant.” (CIR vs Philippine Global Communication, GR 167146, October 31, 2006) The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension. The burden of proof that the taxpayer’s request for reinvestigation had been actually granted shall be on respondent BIR Commissioner. The grant may be expressed in communications with the taxpayer or implied from the actions of the respondent BIR Commissioner or his authorized BIR representatives in response to the request for reinvestigation. (BPI vs CIR, GR 139736, October 17, 2005) (iii) Distraint of personal property including garnishment The prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank. (PCIB vs CA, GR 84526, January 28, 1991) (a) Summary remedy of distraint of personal property (1) Purchase by the government at sale upon distraint (2) Report of sale to the Bureau of Internal Revenue (BIR) (3) Constructive distraint to protect the interest of the government (iv) Summary remedy of levy on real property (a) Advertisement and sale (b) Redemption of property sold (c) Final deed of purchaser (v) Forfeiture to government for want of bidder (a) Remedy of enforcement of forfeitures (1) Action to contest forfeiture of chattel (b) Resale of real estate taken for taxes Bar Ops Pilipinas 2015 Philippine Association of Law Schools

73 (c) When property to be sold or destroyed (d) Disposition of funds recovered in legal proceedings or obtained from forfeiture (vi) Further distraint or levy (vii) Tax lien It is settled that the claim of the government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable. Besides, the distraint on the subject properties of Maritime Company of the Philippines as well as the notice of their seizure were made by petitioner, through the Commissioner of Internal Revenue, long before the writ of execution was issued by the Regional Trial Court. (Republic vs Enriquez, GR 78391, October 21, 1988) (viii) Compromise (a) Authority of the Commissioner to compromise and abate taxes (ix) Civil and criminal actions (a) Suit to recover tax based on false or fraudulent returns The contention is made, and is here rejected, that an assessment of the deficiency tax due is necessary before the taxpayer can be prosecuted criminally for the charges preferred. The crime is complete when the violator has, as in this case, knowingly and willfully filed fraudulent returns with intent to evade and defeat a part or all of the tax. While there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. (Ungab vs Cusi Jr., GR L-41919-24, May 30, 1980) Sec. 269 [now Sec. 222 of the 1997 NIRC] provides that when fraudulent tax returns are involved, a proceeding in court after the collection of such tax may be begun without assessment. The gross disparity in the taxes due and the amounts actually declared constitutes badges of fraud. Applying Ungab v. Cusi, 97 SCRA 877 [1980], assessment is not necessary in filing criminal complaints for tax violations. Assessment of a deficiency is not necessary to a criminal prosecution for tax evasion. The crime is complete when the violator knowingly and willfully filed fraudulent return with intention to evade the tax. (Adamson v. Court of Appeals, 588 SCRA 27) c) Refund A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two options: (1) to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If the option to carry over the excess credit is exercised, the same shall be irrevocable for that taxable period. This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the Tax Code. (Systra Philippines vs CIR, GR 176290, September 21, 2007) Bar Ops Pilipinas 2015 Philippine Association of Law Schools

74

No refund for documentary stamp taxes: documentary stamp taxes are levied on the

exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. Documentary stamp taxes are thus levied on the exercise of these privileges through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto. The documentary stamp taxes must be paid upon the issuance of the said instruments, without regard to whether the contracts which gave rise to them are rescissible, void, voidable, or unenforceable. (Philippine Home Assurance Corp. vs CA, GR 119446, January 21, 1999) Sec. 79 of the 1997 NIRC laid down the irrevocability rule. The taxpayer with excess income tax credits is given the option to either (1) to credit the same to its tax liability for the succeeding taxable periods; or (2) refund the amount or issue tax credit certificate. Once the carry-over option is taken, actually or constructively, it becomes irrevocable. It can never be refunded. The controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option; and once it had already done so, it could no longer make another one. No application for refund or tax credit certificate shall be allowed. The option of the BPI to carry-over the 1998 excess credits is irrevocable. BPI cannot anymore apply for the refund in the event it is unable to credit the said excess. The crediting of the excess credits in the succeeding taxable periods has no prescription unlike the claim for refund which prescribes after two years from the filing of the ITR. In the event the taxpayer fails to make an appropriate marking of its option in the ITR, does not mean that the taxpayer is barred from choosing his option later on. The reason for requiring that a choice be made upon the filing of the ITR is to ease tax administration. Failure to make a choice means that the taxpayer is still uncertain and would show simple negligence or plain oversight. The taxpayer may still make his choice later but once the choice is made, irrevocability of the said choice sets in. (CIR vs. BPI, 592 SCRA 219) (i) Grounds and requisites for refund (ii) Requirements for refund as laid down by cases In cases before tax courts, Rules of Court applies only by analogy or in a suppletory character and whenever practicable and convenient shall be liberally construed in order to promote its objective of securing a just, speedy and inexpensive disposition of every action and proceeding. Since it is not disputed that petitioner is entitled to tax exemption, it should not be precluded from presenting evidence to substantiate the amount of refund it is claiming on mere technicality especially in this case, where the failure to present invoices at the first instance was adequately explained by petitioner. (Philippine Phosphate Fertilizer Corp. vs CIR, GR 141973, June 28, 2005) (a) Necessity of written claim for refund A claimant must first file a written claim for refund, categorically demanding recovery of overpaid taxes with the CIR, before resorting to an action in court. This obviously is intended, first, to afford the CIR an opportunity to correct the action of subordinate officers; and second, to notify the government that such taxes have been questioned, and the

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

75 notice should then be borne in mind in estimating the revenue available for expenditure. (CIR vs Acosta, GR 154068, August 3, 2007) (b) Claim containing a categorical demand for reimbursement (c) Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment regardless of any supervening cause This two-year prescriptive period is intended to apply to suits or proceedings for the recovery of taxes, penalties or sums erroneously, excessively, illegally or wrongfully collected. Accordingly, an availment of a tax credit granted by law may have a different prescriptive period. Absent any specific provision in the Tax Code or special laws, that period would be ten years under Article 1144 of the Civil Code. (Concurring

opinion of Justice Vitug in CIR vs The Philippine American Life Insurance Co., G.R. No. 105208, May 29, 1995)

Section 230 [now Sec. 229, 1997 NIRC] of the Tax Code, as couched, particularly its statute of limitations component, is, in context, intended to apply to suits for the recovery of internal revenue taxes or sums erroneously, excessively, illegally or wrongfully collected. Black defines the term erroneous or illegal tax as one levied without statutory authority. In the strict legal viewpoint, therefore, PNB’s claim for tax credit did not proceed from, or is a consequence of overpayment of tax erroneously or illegally collected. It is beyond cavil that respondent PNB issued to the BIR the check for P180 Million in the concept of tax payment in advance, thus eschewing the notion that there was error or illegality in the payment. (CIR vs PNB, GR 161997, October 25, 2005) Whenever applicable, the two-year prescriptive period starts from the full and final payment of the tax sought to be recovered. (Concurring

opinion of Justice Vitug in CIR vs The Philippine American Life Insurance Co., G.R. No. 105208, May 29, 1995)

For corporations, the two-year prescriptive period within which to claim a refund commences to run, at the earliest, on the date of the filing of the adjusted final tax return. The rationale in computing the two-year prescriptive period with respect to the petitioner corporation's claim for refund from the time it filed its final adjustment return is the fact that it was only then that ACCRAIN could ascertain whether it made profits or incurred losses in its business operations. (ACCRA Investments vs CA, G.R. No. 96322, December 20, 1991) Even if the two (2)-year prescriptive period, if applicable, had already lapsed, the same is not jurisdictional and may be suspended for reasons of equity and other special circumstances. Records show that the BIR’s very own conduct led PNB to believe all along that its original intention to apply the advance payment to its future income tax obligations will be respected by the BIR. (CIR vs PNB, GR 161997, October 25, 2005) Bar Ops Pilipinas 2015 Philippine Association of Law Schools

76

The claim for refund with the Commissioner of Internal Revenue and the subsequent action before the Court of Tax Appeals regarding the refund should all be done within the said period of two years. (CIR vs NPC, G.R. No. L-18874 January 30, 1970) (iii) Legal basis of tax refunds (iv) Statutory basis for tax refund under the tax code (a) Scope of claims for refund (b) Necessity of proof for claim or refund (c) Burden of proof for claim of refund Tax refunds, like tax exemptions, are construed strictly against the taxpayer. The claimants have the burden of proof to establish the factual basis of their claim for refund or tax credit. (Hitachi Global vs CIR, G.R. No. 174212, October 20, 2010) The Commissioner’s contention that a tax refund partakes the nature of a tax exemption does not apply to the tax refund to which Fortune Tobacco is entitled. There is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute. Obviously, that is not the situation here. Quite the contrary, Fortune Tobaccos claim for refund is premised on its erroneous payment of the tax, or better still the government’s exaction in the absence of a law. (CIR vs Fortune Tobacco Corp., GR 167274-75, July 21, 2008) (d) Nature of erroneously-paid tax/illegally assessed collected (e) Tax refund vis-à-vis tax credit Formally, a tax refund requires a physical return of the sum erroneously paid by the taxpayer, while a tax credit involves the application of the reimbursable amount against any sum that may be due and collectible from the taxpayer. On the practical side, the taxpayer to whom the tax is refunded would have the option, among others, to invest for profit the returned sum, an option not proximately available if the taxpayer chooses instead to receive a tax credit. (CIR vs Philippine Phosphate Fertilizer Corporation, G.R. No. 144440, September 1, 2004) (f) Essential requisites for claim of refund (v) Who may claim/apply for tax refund/tax credit (a) Taxpayer/withholding agents of non-resident foreign corporation The proper party to question, or seek a refund of an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. (Silkair vs CIR, G.R. Nos. 171383 & 172379, November 14, 2008) A withholding agent is a proper party to claim tax refund. He is “liable to pay the tax” “and subject to tax.” The withholding agent is constituted Bar Ops Pilipinas 2015 Philippine Association of Law Schools

77 the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. (CIR vs Procter & Gamble, GR L-66838, December 2, 1991) (vi) Prescriptive period for recovery of tax erroneously or illegally collected (vii) Other consideration affecting tax refunds 2. Government remedies a) Administrative remedies (i) Tax lien (ii) Levy and sale of real property (iii) Forfeiture of real property to the government for want of bidder (iv) Further distraint and levy (v) Suspension of business operation (vi) Non-availability of injunction to restrain collection of tax The National Internal Revenue Code of 1997 (NIRC) expressly provides that no court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the code. The situation, however, is different in the case of the collection of local taxes as there is no express provision in the LGC prohibiting courts from issuing an injunction to restrain local governments from collecting taxes. Such statutory lapse or intent, however it may be viewed, may have allowed preliminary injunction where local taxes are involved but cannot negate the procedural rules and requirements under Rule 58. (Angeles City vs. Angeles City Electric Corp., GR 166134, June 29, 2010) b) Judicial remedies 3. Statutory offenses and penalties a) Civil penalties It is mandatory to collect penalty and interest at the stated rate in case of delinquency. The intention of the law is to discourage delay in the payment of taxes due the Government and, in this sense, the penalty and interest are not penal but compensatory for the concomitant use of the funds by the taxpayer beyond the date when he is supposed to have paid them to the Government. If penalties could be condoned for flimsy reasons, the law imposing penalties for delinquencies would be rendered nugatory, and the maintenance of the Government and its multifarious activities will be adversely affected. (Philippine Refining Company vs. CA, GR 118794, May 8, 1996) The taxpayer should be liable only for tax proper and should not be held liable for the surcharge and interest when it appears that the assessment is highly controversial. The Commissioner at the outset was not certain as to petitioner's income tax liability. (Cagayan Electric Power Light vs CIR, G.R. No. L-60126, September 25, 1985) (i) Surcharge (ii) Interest Bar Ops Pilipinas 2015 Philippine Association of Law Schools

78 (a) In general (b) Deficiency interest (c) Delinquency interest (d) Interest on extended payment 4. Compromise and abatement of taxes a) Compromise Compromise may be the favored method to settle disputes, but when it involves taxes, it may be subject to closer scrutiny by the courts. A compromise agreement involving taxes would affect not just the taxpayer and the BIR, but also the whole nation, the ultimate beneficiary of the tax revenues collected. (PNOC vs CA, G.R. No. 109976, April 26, 2005) The discretionary authority to compromise granted to the BIR Commissioner is never meant to be absolute, uncontrolled and unrestrained. No such unlimited power may be validly granted to any officer of the government, except perhaps in cases of national emergency. The BIR Commissioner would have to exercise his discretion within the parameters set by the law, and in case he abuses his discretion, the CTA may correct such abuse if the matter is appealed to them. (PNOC vs CA, G.R. No. 109976, April 26, 2005) RMO No. 39-86 expressly allows a withholding agent, who failed to withhold the required tax because of neglect, ignorance of the law, or his belief that he was not required by law to withhold tax, to apply for a compromise settlement of his withholding tax liability under E.O. No. 44. A withholding agent, in such a situation, may compromise the withholding tax assessment against him precisely because he is being held directly accountable for the tax. RMO No. 39-86 distinguishes between the withholding agent in the foregoing situation from the withholding agent who withheld the tax but failed to remit the amount to the Government. A withholding agent in the latter situation is the one disqualified from applying for a compromise settlement because he is being made accountable as an agent, who held funds in trust for the Government. (PNOC vs CA, G.R. No. 109976, April 26, 2005) b) Abatement The BIR may therefore abate or cancel the whole or any unpaid portion of a tax liability, inclusive of increments, if its assessment is excessive or erroneous; or if the administration costs involved do not justify the collection of the amount due. No mutual concessions need be made, because an excessive or erroneous tax is not compromised; it is abated or canceled. Only correct taxes should be paid. (People vs Sandiganbayan, GR 152532, August 16, 2005) F. Organization and Function of the Bureau of Internal Revenue 1. Rule-making authority of the Secretary of Finance The authority of the Minister of Finance (now the Secretary of Finance), in conjunction with the Commissioner of Internal Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal revenue laws cannot be controverted. Neither can it be disputed that such rules and regulations, as well as administrative opinions and rulings, ordinarily should deserve weight and respect by the courts. Much more fundamental than either of the above, however, is that all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. Administrative rules and regulations are intended to Bar Ops Pilipinas 2015 Philippine Association of Law Schools

79 carry out, neither to supplant nor to modify, the law. (CIR vs CA, G.R. No. 108358, January 20, 1995) a) Authority of Secretary of Finance to promulgate rules and regulations b) Specific provisions to be contained in rules and regulations c) Non-retroactivity of rulings 2. Power of the Commissioner to suspend the business operation of a taxpayer III. Local Government Code of 1991, as amended A. Local government taxation 1. Fundamental principles The fundamental law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while the local government units are being strengthened and made more autonomous, the legislature must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each local government unit will have its fair share of available resources, (c) the resources of the national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.(Manila Electric Co. v. Province of Laguna, G.R. No. 131359, May 05, 1999) 2. Nature and source of taxing power Under the now prevailing Constitution, where there is neither a grant nor prohibition by statute, the taxing power of local governments must be deemed to exist although Congress may provide statutory limitations and guidelines in order to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. (City Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999) a) Grant of local taxing power under the local government code Local governments do not have the inherent power to tax except to the extent that such power might be delegated to them either by the basic law or by statute. Presently, under Article X of the 1987 Constitution, a general delegation of that power has been given in favor of local government units. (Manila Electric Company vs Province of Laguna, G.R. No. 131359, May

5, 1999)

b) c) d) e) f) g)

Authority to prescribe penalties for tax violations Authority to grant local tax exemptions Withdrawal of exemptions Authority to adjust local tax rates Residual taxing power of local governments Authority to issue local tax ordinances

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial inquiry.(Victorias Milling Co., Inc. v. Municipality of Victorias, G.R. No.

L-21183, September 27, 1968)

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80

3. Local taxing authority a) Power to create revenues exercised through Local Government Units b) Procedure for approval and effectivity of tax ordinances It is clear under Sec. 188 of R.A. No. 7160 and Art. 277 of its implementing rules that the requirement of publication is MANDATORY and leaves no choice. The use of the word "shall" in both provisions is imperative, operating to impose a duty that may be enforced (Coca-

Cola Bottlers Phil., Inc. v. City of Manila, G.R. No. 156252, June 27, 2006)

It is categorical, therefore, that a public hearing be held prior to the enactment of an ordinance levying taxes, fees, or charges; and that such public hearing be conducted as provided under Section 277 of the Implementing Rules and Regulations of the Local Government Code.(Ongsuco v. Malones, G.R. No. 182065, October 27, 2009) 4. Scope of taxing power The taxing power of cities, municipalities and municipal districts may be used (1) upon any person engaged in any occupation or business, or exercising any privilege therein; (2) for services rendered by those political subdivisions or rendered in connection with any business, profession or occupation being conducted therein, and (3) to levy, for public purposes just and uniform taxes, licenses or fees (Philippine Match Co., Ltd. v. City of Cebu, G.R. No. L-30745,

January 18, 1978)

5. Specific taxing power of Local Government Units a) Taxing powers of provinces (i) Tax on transfer of real property ownership (ii) Tax on business of printing and publication (iii) Franchise tax As commonly used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state." To determine whether the petitioner is covered by franchise tax, the following requisites should concur: (1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under this franchise within the territory of the respondent city government. (National Power Corporation v. City of Cabanatuan, G.R. No. 149110, April 09,

2003)

Meralco is subject to the local franchise tax. Its exemption has been withdrawn under Sec. 137 and Sec. 193 of RA 7160. The LGU (San Pablo and Laguna) is correct on relying the provisions of Secs. 137 & 193 that Meralco’s tax exemption has been withdrawn. Sec. 137 authorizes the province to impose franchise tax “notwithstanding any exemption granted by any law or other special law”. The local franchise tax is imposable despite any exemption enjoyed under special laws. Sec. 193 provides the withdrawal of all tax exemptions or incentives granted to or presently enjoyed by all persons whether natural or juridical including GOCCs. Thus, any existing tax exemption or incentive enjoyed by Meralco under existing law was clearly intended to be withdrawn. Further, the LGC contains a general repealing clause in its Sec. 534 (f).

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

81 Accordingly, we held in Mactan Cebu Int’l Airport Authority v. Marcos, 261 SCRA 667, that Sec. 193 of the LGC prescribes the general rule, viz., the tax exemptions or incentives granted to persons are withdrawn upon effectivity of RA 7160, except to those entities enumerated. Invoking the non-impairment clause is non-availing because a franchise granted is subject to amendment, or repeal by Congress when public interest so requires, which restriction was not only present in 1935 Constitution (Art. XIV, Sec. 8) but in the 1973 (Art. XIV, Sec. 5), as well as in the 1987 Constitution (Art. XII, Sec. 11). With or without reservation clause, franchises are subject to alterations as an exercise of police power or the power to tax. (City of San Pablo v. Judge Reyes, 305 SCRA 353; Meralco v. Prov. Of Laguna, 306 SCRA 750) (iv)

Tax on sand, gravel and other quarry services

Under the Local Tax Code. there is no question that the authority to impose the license fees collected from the hauling of sand and gravel excavated properly belongs to the province concerned and not to the municipality where they are found which is specifically prohibited under Section 22 of the same Code "from levying taxes, fees and charges that the province or city is authorized to levy in this Code." (Municipality of San Fernando, La Union v. Sta. Romana,

G.R. No. L-30159, March 31, 1987)

In order for an entity to legally undertake a quarrying business, he must first comply with all the requirements imposed not only by the national government, but also by the local government unit where his business is situated. Particularly, Section 138 (2) of RA 7160 requires that such entity must first secure a governor's permit prior to the start of his quarrying operations||| (Province of Cagayan v. Lara, G.R. No. 188500, July 24, 2013) The principle that when a company is taxed on its main business, it is no longer taxable for engaging in an activity that is but a part of, incidental to, and necessary to such main business, applies to business taxes and not to taxes such as the sand and gravel tax imposed by the provincial government, based on the reasoning that the incidental activity could not be treated as a business separate and distinct from the main business of the taxpayer as the sand and gravel tax is an excise tax imposed on the privilege of extracting sand and gravel. It is settled that provincial governments can levy excise taxes on quarry resources independently from national government. (Lepanto Consolidated Mining Company v. Ambanloc,

G.R. No. 180639, June 29, 2010) (v) (vi)

Professional tax Amusement tax

Resorts, swimming pools, bath houses, hot springs, and tourist spots are not among those places expressly mentioned by Section 140 of the LGC as being subject to amusement taxes. (Principle of Ejusdem Generis) (Pelizloy Realty Corp. v. Province of Benguet, G.R. No.

183137, April 10, 2013)

In determining the meaning of the phrase "other places of amusement," under Sec. 13 of the Local Tax Code, one must refer to the prior enumeration of theaters, cinematographs, concert halls and circuses with artistic expression as their common characteristic. Professional basketball games do not fall under the same category as theaters, cinematographs, concert halls and circuses as the latter basically belong to artistic forms of entertainment while the Bar Ops Pilipinas 2015 Philippine Association of Law Schools

82 former caters to sports and gaming. (Philippine Basketball Assn. v. Court of Appeals, G.R. No.

119122, August 08, 2000)

It is the intent of the legislature not to impose VAT on persons already covered by the amusement tax. (CIR v. SM Prime Holdings, Inc., G.R. No. 183505, February 26, 2010) (vii)

Tax on delivery truck/van

b) Taxing powers of cities c) Taxing powers of municipalities (i) Tax on various types of businesses Business taxes imposed in the exercise of police power for regulatory purposes are paid for the privilege of carrying on a business in the year the tax was paid. It is paid at the beginning of the year as a fee to allow the business to operate for the rest of the year. It is deemed a prerequisite to the conduct of business.||| (Mobil Philippines Inc. v. City Treasurer of

Makati, G.R. No. 154092, July 14, 2005)

When a municipality or city has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143 (a) of the LGC, said municipality or city may no longer subject the same manufacturers, etc. to a business tax under Section 143 (h) of the same Code. Section 143 (h) may be imposed only on businesses that are subject to excise tax, VAT, or percentage tax under the NIRC, and that are "not otherwise specified in preceding paragraphs".

(City of Manila v. Coca-Cola Bottlers Philippines, Inc., G.R. No. 181845, August 04, 2009)

By its very nature a condominium corporation is not engaged in business, and any profit that it derives is merely incidental, hence it may not be subject to business taxes. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005) (ii) (iii) (iv)

Ceiling on business tax impossible on municipalities within Metro Manila Tax on retirement on business Rules on payment of business tax

Tax should be computed based on gross receipts; the right to receive income, and not the actual receipt, determines when to include the amount in gross income. The imposition of local business tax based on petitioner’s gross revenue will inevitably result in the constitutionally proscribed double taxation – taxing of the same person twice by the same jurisdiction for the same thing – inasmuch as petitioner’s revenue or income for a taxable year will definitely include its gross receipts already reported during the previous year and for which local business tax has already been paid. (Ericsson Telecoms vs. City of Pasig. G.R. NO. 176667, November

22, 2007)

(v) Fees and charges for regulation & licensing A municipality is authorized to impose three kinds of licenses: 1) license for regulation of useful occupations or enterprises; 2) license for restriction or regulation of non-useful occupations or enterprises; and 3) license for revenue. The first two easily fall within the broad police power granted under the general welfare clause; the third class, however, is for revenue Bar Ops Pilipinas 2015 Philippine Association of Law Schools

83 purposes. (Victorias Milling Co., Inc. v. Municipality of Victorias, G.R. No. L-21183, September

27, 1968)

(vi)

Situs of tax collected

The power to levy an excise upon the performance of an act or the engaging in an occupation does not depend upon the domicile of the person subject to the excise, nor upon the physical location of the property and in connection with the act or occupation taxed, but depends upon the place in which the act is performed or occupation engaged in. (Allied Thread

Co., Inc. v. City Mayor of Manila, G.R. No. L-40296, November 21, 1984)

Under a city ordinance which imposes tax on sales of goods in the city, the city can validly tax sales to customers outside of the city as long as the orders were booked and paid for, and the goods were delivered to the carrier, in the city. The goods can be regarded as sold in the city because delivery to the carrier is delivery to the buyer.||| (Philippine Match Co., Ltd.

v. City of Cebu, G.R. No. L-30745, January 18, 1978) d) Taxing powers of barangays e) Common revenue raising powers (i) Service fees and charges (ii) Public utility charges (iii) Toll fees or charges f) Community tax

6. Common limitations on the taxing powers of LGUs The fundamental law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while the local government units are being strengthened and made more autonomous, the legislature must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each local government unit will have its fair share of available resources; (c) the resources of the national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just. (Manila Electric Company vs Province of Laguna, G.R. No. 131359, May 5,

1999)

While the power to tax by local governments may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution, the basic doctrine on local taxation remains essentially the same, “the power to tax is [still] primarily vested in the Congress.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680) Section 133(e) of RA No. 7160 prohibits the imposition, in the guise of wharfage, of fees — as well as all other taxes or charges in any form whatsoever — on goods or merchandise. It is therefore irrelevant if the fees imposed are actually for police surveillance on the goods, Bar Ops Pilipinas 2015 Philippine Association of Law Schools

84 because any other form of imposition on goods passing through the territorial jurisdiction of the municipality is clearly prohibited by Section 133(e). (Palma Development Corp. v. Municipality of

Malangas, G.R. No. 152492, October 16, 2003)

The language of Section 133 (h) of RA No. 7160 makes plain that the prohibition with respect to petroleum products extends not only to excise taxes thereon, but all "taxes, fees and charges." ||| While local government units are authorized to burden all such other class of goods with "taxes, fees and charges", excepting excise taxes, a specific prohibition is imposed barring the levying of any other type of taxes with respect to petroleum products. (Petron

Corporation v. Tiangco, G.R. No. 158881, April 16, 2008)

7. Collection of business tax a) Tax period and manner of payment b) Accrual of tax c) Time of payment d) Penalties on unpaid taxes, fees or charges e) Authority of treasurer in collection and inspection of books 8. Taxpayer’s remedies As a general precept, a taxpayer may file a complaint assailing the validity of the ordinance and praying for a refund of its perceived overpayments without first filing a protest to the payment of taxes due under the ordinance. (Jardine Davies Insurance Brokers Inc. v.

Aliposa, G.R. No. 118900, February 27, 2003)

a) Periods of assessment and collection of local taxes, fees or charges b) Protest of assessment c) Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge 9. Civil remedies by the LGU for collection of revenues a) Local government’s lien for delinquent taxes, fees or charges b) Civil remedies, in general (i) Administrative action (ii) Judicial action Unlike the National Internal Revenue Code, the Local Tax Code does not contain any specific provision prohibiting courts from enjoining the collection of local taxes. Such Statutory lapse or intent, however it may be viewed, may have allowed preliminary injunction where local taxes are involved but cannot negate the procedural rules and requirements under Rule 58. (Valley Trading Co., Inc. v. CFI of Isabela, Branch II, G.R. No. L-49529, March 31, 1989) B. Real property taxation 1. Fundamental principles 2. Nature of real property tax Bar Ops Pilipinas 2015 Philippine Association of Law Schools

85 3. Imposition of real property tax a) Power to levy real property tax b) Exemption from real property tax As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether outpatient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. (Lung Center of the Phil. v. Quezon City, G.R. No. 144104, June 29, 2004) Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "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." (Lung Center of the Phil. v. Quezon City, G.R.

No. 144104, June 29, 2004)

Under Section 234(a), real property owned by the Republic is exempt from real estate tax except when the government gives the beneficial use of the real property to a taxable entity. The justification for the exception to the exemption is that the real property, although owned by the Republic, is not devoted to public use or public service but devoted to the private gain of a taxable person. (Manila International Airport Authority v. Court of Appeals,

G.R. No. 155650, July 20, 2006)

In MIAA v. Court of Appeals & Parañaque City, 495 SCRA 591 [2006], the Supreme Court resolved this issue that MIAA is not a government owned or controlled corporation but a government instrumentality vested with corporate powers and performing essential public services. MIAA is not subject to any local tax except when its properties are used by taxable entity or if the beneficial use of real property owned by the Republic is given to a taxable entity. The airport lands and buildings of MIAA are properties devoted to public use and thus are properties of public dominion. They are owned by the State or the Republic under Art. 420 of the NCC. Hence, the properties of MIAA are exempted from the real property tax under Sec. 234(a) LGC. Only those portions of the NAIA Pasay properties which are leased to taxable persons like private parties are the ones subject to the real property tax by Pasay City. (MIAA v. City of Pasay, 583 SCRA 234) 4. Appraisal and assessment of real property tax a) Rule on appraisal of real property at fair market value Real properties shall be appraised at the current and fair market value prevailing in the locality where the property is situated and classified for assessment purposes on the basis of its actual use. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

86 In fixing the value of real property, assessors have to consider all the circumstances and elements of value and must exercise prudent discretion in reaching conclusions. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005) b) Declaration of real property A tax declaration does not prove ownership; it is merely an indicium of a claim of ownership. Neither tax receipts nor declaration of ownership for taxation purposes are evidence of ownership or of the right to possess realty when not supported by other effective proofs. (De

Vera-Cruz v. Miguel, G.R. No. 144103, August 31, 2005)

Although tax declarations or realty tax payment of property are not conclusive evidence of ownership, nevertheless, they are good indicia of possession in the concept of owner, for no one in his right mind would be paying taxes for a property that is not in his actual or constructive possession. They constitute at least proof that the holder has a claim of title over the property. (Heirs of Santiago v. Heirs of Santiago, G.R. No. 151440, June

17, 2003)

It is `the duty of each person' acquiring real estate in the city to make a new declaration thereof, with the advertence that failure to do so shall make the assessment in the name of the previous owner 'valid and binding on all persons interested, and for all purposes, as though the same had been assessed in the name of its actual owner.' (Heirs of Tajonera v.

Court of Appeals, G.R. No. L-26677, March 27, 1981)

c) Listing of real property in assessment rolls d) Preparation of schedules of fair market value (i) Authority of assessor to take evidence (ii) Amendment of schedule of fair market value e) Classes of real property f) Actual use of property as basis of assessment g) Assessment of real property (i) Assessment levels (ii) General revisions of assessments and property classification (iii) Date of effectivity of assessment or reassessment (iv) Assessment of property subject to back taxes (v) Notification of new or revised assessment h) Appraisal and assessment of machinery 5. Collection of real property tax a) Date of accrual of real property tax and special levies b) Collection of tax (i) Collecting authority (ii) Duty of assessor to furnish local treasurer with assessment rolls (iii) Notice of time for collection of tax c) Periods within which to collect real property tax d) Special rules on payment (i) Payment of real property tax in installments (ii) Interests on unpaid real property tax (iii) Condonation of real property tax Bar Ops Pilipinas 2015 Philippine Association of Law Schools

87 e) Remedies of LGUs for collection of real property tax (i) Issuance of notice of delinquency for real property tax payment With regard to determining to whom the notice of sale should have been sent, settled is the rule that, for purposes of real property taxation, the registered owner of the property is deemed the taxpayer. Thus, in identifying the real delinquent taxpayer, a local treasurer cannot rely solely on the tax declaration but must verify with the Register of Deeds who the registered owner of the particular property is. (Spouses Hu v. Spouses Unico, G.R. No. 146534, September

18, 2009)

It has been ruled that the notices and publication, as well as the legal requirements for a tax delinquency sale, are mandatory; and the failure to comply therewith can invalidate the sale. The prescribed notices must be sent to comply with the requirements of due process. (De

Knecht v. Court of Appeals, G.R. No. 108015, 109234, May 20, 1998)

The delinquent taxpayer referred to under Sec. 72 of PD No. 464 is the actual owner of the property at the time of the delinquency and mere compliance by the provincial or city treasurer with Sec. 65 of the decree is no longer enough. The notification to the right person, i.e., the real owner, is an essential and indispensable requirement of the law, non-compliance with which renders the auction sale void. (Estate of Jacob v. Court of Appeals, G.R. No. 120435,

120974, December 22, 1997) (ii) (iii) (iv) (v)

Local government’s lien Remedies in general Resale of real estate taken for taxes, fees or charges Further levy until full payment of amount due

6. Refund or credit of real property tax a) Payment under protest b) Repayment of excessive collections 7. Taxpayer’s remedies a) Contesting an assessment of value of real property (i) Appeal to the Local Board of Assessment Appeals (ii) Appeal to the Central Board of Assessment Appeals (iii) Effect of payment of tax b) Payment of real property tax under protest (i) File protest with local treasurer The protest contemplated under Sec. 252 of R.A. 7160 is needed where there is a question as to the reasonableness of the amount assessed. Hence, if a taxpayer disputes the reasonableness of an increase in a real estate tax assessment, he is required to "first pay the tax" under protest; otherwise, the city or municipal treasurer will not act on his protest. (Ty v.

Trampe, G.R. No. 117577, December 01, 1995)

The trial court has no jurisdiction to entertain a Petition for Prohibition absent petitioner's payment, under protest, of the tax assessed as required by Sec. 64 of the Bar Ops Pilipinas 2015 Philippine Association of Law Schools

88 RPTC. Payment of the tax assessed under protest, is a condition sine qua non before the trial court could assume jurisdiction over the petition and failure to do so, the RTC has no jurisdiction to entertain it. (Manila Electric Co. v. Barlis, G.R. No. 114231, May 18, 2001) Under then Sec. 30 of PD 464 [now under Sec. 226, LGC], having failed to appeal the real property assessments to the LBAA, taxpayer now cannot assail the validity of the tax assessment before the courts. For failure to exhaust administrative remedies, the assessment became final. Under Sec. 64 of PD 464 [now under Sec. 252, LGC), the taxpayer must first pay under protest and then assail the validity of the assessment. (Davao Oriental Electric Coop vs. Prov. Dvo. of Oriental, 576 SCRA 645) (ii)

Appeal to the Local Board of Assessment Appeals

Under Section 226 of R.A. No 7160, the last action of the local assessor on a particular assessment shall be the notice of assessment; it is this last action which gives the owner of the property the right to appeal to the LBAA. The procedure likewise does not permit the property owner the remedy of filing a motion for reconsideration before the local assessor. (Fels Energy,

Inc. v. Province of Batangas, G.R. No. 168557, 170628, February 16, 2007) (iii) (iv) (v)

Appeal to the Central Board of Assessment Appeals Appeal to the CTA Appeal to the Supreme Court

IV. Tariff and Customs Code of 1978, as amended A. Tariff and duties, defined "Customs duties" is "the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. (Nestle Philippines, Inc. v. Court of Appeals, G.R. No. 134114, July 06, 2001) B. General rule: all imported articles are subject to duty. 1. Importation by the government taxable C. Purpose for imposition D. Flexible tariff clause E. Requirements of importation 1. Beginning and ending of importation Section 1202 of the Tariff and Customs Code provides that importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unload therein. It is clear from the provision of the law that mere intent to unload is sufficient to commence an importation and "intent," being a state of mind, is rarely susceptible of direct proof, but must ordinarily be inferred from the facts, and therefore can only be proved by unguarded, expressions, conduct and circumstances generally. (Feeder International Line, Pte.,

Ltd. v. Court of Appeals, G.R. No. 94262, May 31, 1991)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

89 Importation is terminated only upon the payment of duties, taxes and other charges upon the articles, or secured to be paid, at the port of entry and the legal permit for withdrawal shall have been granted. Payment of the duties, taxes, fees and other charges must be in full.

(Papa v. Mago, G.R. No. L-27360, February 28, 1968)

Under Section 1202 of the TCCP, importation takes place when merchandise is brought into the customs territory of the Philippines with the intention of unloading the same at port. An exception to this rule is transit cargo entered for immediate exportation which may be allowed under Section 2103 of the TCCP when the following concur: (a) there is a clear intent to export the article as shown in the bill of lading, invoice, cargo manifest or other satisfactory evidence; (b) the Collector must designate the vessel or aircraft wherein the articles are laden as a constructive warehouse to facilitate the direct transfer of the articles to the exporting vessel or aircraft; (c) the imported articles are directly transferred from the vessel or aircraft designated as a constructive warehouse to the exporting vessel or aircraft and (d) an irrevocable domestic letter of credit, bank guaranty or bond in an amount equal to the ascertained duties, taxes and other charges is submitted to the Collector (unless it appears in the bill of lading, invoice, manifest or satisfactory evidence that the articles are destined for transshipment). (Commissioner of Customs v. Court of Tax Appeals,

G.R. Nos. 171516-17, February 13, 2009)

2. Obligations of importer a) Cargo manifest b) Import entry The term "entry" in Customs law has a triple meaning. It means (1) the documents filed at the Customs house; (2) the submission and acceptance of the documents; and (3) the procedure of passing goods through the Customs house. (Jardeleza v. People, G.R. No. 165265,

February 06, 2006) c) d) e) f)

Declaration of correct weight or value Liability for payment of duties Liquidation of duties Keeping of records

F. Importation in violation of tax credit certificate 1. Smuggling Smuggling is committed by any person who: (1) fraudulently imports or brings into the Philippines any article contrary to law; (2) assists in so doing any article contrary to law; or (3) receives, conceals, buys, sells or in any manner facilitate the transportation, concealment or sale of such goods after importation, knowing the same to have been imported contrary to law. (Jardeleza v. People, G.R. No. 165265, February 06, 2006)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

90 The Tariff and Customs law subjects to forfeiture any article which is removed contrary to law from any public or private warehouse under customs supervision, or released irregularly from Customs custody. Before forfeiture proceedings are instituted the law requires the presence of probable cause; once established, the burden of proof is shifted to the claimant. (Carrara Marble Phil., Inc. v. Commissioner of Customs, G.R. No. 129680, September

01, 1999)

In order to warrant forfeiture, it is not necessary that the vessel or aircraft must itself carry the contraband. There is nothing in the law that so requires. (Llamado v. Commissioner of

Customs, G.R. No. L-28809, May 16, 1983) 2. Other fraudulent practices G. Classification of goods 1. Taxable importation 2. Prohibited importation

Prohibited importations are subject to forfeiture whether the importation is direct or indirect such as when the shipper and the consignee are one and the same person. (Paterok v.

Bureau of Customs, G.R. Nos. 90660-61, January 21, 1991)

Although the illegally imported articles may not be absolutely prohibited, but only qualifiedly prohibited under Sec. 102 (K) of the Tariff and Customs Code, for it may be imported subject to certain conditions, it is nonetheless prohibited and is a contraband (Comm. of Customs vs. CTA & Dichoco, L-33471, Jan. 31, 1972), and the legal effects of the importation of qualifiedly prohibited articles are the same as those of absolutely prohibited articles. (Auyong

Hian v. CTA, G.R. No. L-28782, September 12, 1974) 3. Conditionally-free importation

H. Classification of duties 1. Ordinary/regular duties a) Ad valorem; methods of valuation (i) Transaction value (ii) Transaction value of identical goods (iii) Transaction value of similar goods (iv) Deductive value (v) Computed value (vi) Fallback value b) Specific 2. Special duties a) Dumping duties b) Countervailing duties c) Marking duties d) Retaliatory/discriminatory duties Bar Ops Pilipinas 2015 Philippine Association of Law Schools

91 e) Safeguard I. Remedies 1. Government a) Administrative/extrajudicial (i) Search, seizure, forfeiture, arrest It is quite clear that seizure and forfeiture proceedings under the tariff and customs laws are not criminal in nature as they do not result in the conviction of the offender nor in the imposition of the penalty provided for in section 3601 of the Code. As can be gleaned from Section 2533 of the code, seizure proceedings, such as those instituted in this case, are purely civil and administrative in character, the main purpose of which is to enforce the administrative fines or forfeiture incident to unlawful importation of goods or their deliberate possession. (People v. Court of First Instance of Rizal, G.R. No. L-41686, November 17, 1980) In administrative proceedings, such as those before the BOC, technical rules of procedure and evidence are not strictly applied and administrative due process cannot be fully equated with due process in its strict judicial sense. The essence of due process is simply an opportunity to be heard or, as applied to administrative proceedings, an opportunity to explain one's side or an opportunity to seek reconsideration of the action or ruling complained of. (El

Greco Ship Manning and Management Corporation v. Commissioner of Customs, G.R. No. 177188, December 04, 2008)

It is settled that the Bureau of Customs acquires exclusive jurisdiction over imported goods for purposes of enforcing the Customs laws, from the moment the goods are actually in possession and control of said Bureau even in the absence of any warrant of seizure or detention. (Papa v. Mago, G.R. No. L-27360, February 28, 1968) Regional trial courts are devoid of any competence to pass upon the validity or regularity of seizure and forfeiture proceedings conducted by the BOC and to enjoin or otherwise interfere with these proceedings. Regional trial courts are precluded from assuming cognizance over such matters even through petitions for certiorari, prohibition or mandamus. (Subic Bay Metropolitan

Authority v. Rodriguez, G.R. No. 160270, April 23, 2010)

Even if the seizure by the Collector of Customs were illegal, which has yet to be proven, we have said that such act does not deprive the Bureau of Customs of jurisdiction thereon. The allegations of petitioners regarding the propriety of the seizure should properly be ventilated before the Collector of Customs. (Jao v. Court of Appeals, G.R. No. 104604, 111223, October

06, 1995)

A forfeiture proceeding is in the nature of a proceeding in rem, i.e., directed against the res or imported articles and entails a determination of the legality of their importation. In this proceeding, it is in legal contemplation the property itself which commits the violation and is treated as the offender, without reference whatsoever to the character or conduct of the owner. (Transglobe International, Inc. v. Court of Appeals, G.R. No. 126634, January 25, 1999) Settlement of the case by payment of the fine or redemption of the forfeited property, prior to the filing of the criminal action, does not extinguish the offender's criminal liability Bar Ops Pilipinas 2015 Philippine Association of Law Schools

92 under Section 3601 of the Tariff and Customs Code. (People v. Desiderio, G.R. No. L-20805,

November 29, 1965)

The requisites for the forfeiture of goods under Section 2530(f), in relation to (1) (3-5), of the Tariff and Customs Code are: (a) the wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful making or delivery by the same person of any invoice, letter or paper — all touching on the importation or exportation of merchandise; (b) the falsity of such declaration, affidavit, invoice, letter or paper; and (c) an intention on the part of the importer/consignee to evade the payment of the duties due. (Republic v. CTA, G.R. No. 139050, October 02, 2001) Once probable cause has been shown for the institution of forfeiture proceedings, the burden of proof is upon claimant to establish that he fell within the purview of the exception. The legal presumption in Section 5(j), Rule 131 of the Rules of Court and Article 541 of the Civil Code are of a general character and cannot prevail over the specific provisions of the Tariff and Customs Code. (Acting Commr. of Customs v. CTA, G.R. No. 62636, April 27, 1984) b) Judicial (i) Rules on appeal including jurisdiction 2. Taxpayer a) Protest b) Abandonment Both the Import Entry Declaration (IED) and Import Entry and Internal Revenue Declaration (IEIRD) should be filed within 30 days from the date of discharge of the last package from the vessel or aircraft. (Chevron Philippines, Inc. v. Commr., G.R. No. 178759,

August 11, 2008)

c) Abatement and refund

V. Judicial Remedies (R.A. No. 1125, as amended, and the Revised Rules of the Court of Tax Appeals) A. Jurisdiction of the Court of Tax Appeals 1. Exclusive appellate jurisdiction over civil tax cases a) Cases within the jurisdiction of the court en banc The appellate jurisdiction of the CTA is not limited to cases which involve decisions of the CIR on matters relating to assessments or refunds. Section 7 of Republic Act No. 1125||| covers other cases that arise out of the National Internal Revenue Code (NIRC) or related laws administered by the Bureau of Internal Revenue (BIR). (Commr. v. Hambretch &

Quist Philippines, Inc., G.R. No. 169225, November 17, 2010)

Bar Ops Pilipinas 2015 Philippine Association of Law Schools

93 In line with the lifeblood doctrine, the National Internal Revenue Code of 1997 (NIRC) expressly provides that no court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the code. An exception to this rule obtains only when in the opinion of the Court of Tax Appeals (CTA) the collection thereof may jeopardize the interest of the government and/or the taxpayer. (Angeles City v.

Angeles Electric Corporation, G.R. No. 166134, June 29, 2010)

b) Cases within the jurisdiction of the court in divisions Without the automatic review by the Commissioner of Customs and the Secretary of Finance, a collector in any of our country's far-flung ports, would have absolute and unbridled discretion to determine whether goods seized by him are locally produced, hence, not dutiable, or of foreign origin, and therefore subject to payment of customs duties and taxes. His decision, unless appealed by the aggrieved party (the owner of the goods), would become final with no one the wiser except himself and the owner of the goods. (Yaokasin v. Commissioner of

Customs, G.R. No. 84111, December 22, 1989)

Section 7 of Republic Act No. 1125, creating the Court of Tax Appeals, in providing for appeals from — '(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of the law administered by the Bureau of Internal Revenue — allows an appeal from a decision of the Collector in cases involving 'disputed assessments' as distinguished from cases involving 'refunds of internal revenue taxes, fees or other charges, . . .'; To hold that the taxpayer has now lost the right to appeal from the ruling on the disputed assessment but must prosecute his appeal under Section 306 of the Tax Code, which requires a taxpayer to file a claim for refund of the taxes paid as a condition precedent to his right to appeal, would in effect require of him to go through a useless and needless ceremony that would only delay the disposition of the case, for the Collector (now Commissioner) would certainly disallow the claim for refund in the same way as he disallowed the protest against the assessment. (Vda. de San

Agustin v. Commr., G.R. No. 138485, September 10, 2001)

While the law confers on the CTA jurisdiction to resolve tax disputes in general, this does not include cases where the constitutionality of a law or rule is challenged. Where what is assailed is the validity or constitutionality of a law, or a rule or regulation issued by the administrative agency in the performance of its quasi-legislative function, the regular courts have jurisdiction to pass upon the same. (British American Tobacco v. Camacho, G.R. No.

163583, August 20, 2008)

The reviewable decision of the Bureau of Internal Revenue is that contained in the letter of its Commissioner, that such constitutes the final decision on the matter which may be appealed to the Court of Tax Appeals and not the warrants of distraint. It was likewise stressed that the procedure enunciated is demanded by the pressing need for fair play, regularity and orderliness in administrative action. (Commr. v. Union Shipping Corp., G.R. No. 66160, May 21,

1990)

A final demand letter from the Bureau of Internal Revenue, reiterating to the taxpayer the immediate payment of a tax deficiency assessment previously made, is tantamount to a Bar Ops Pilipinas 2015 Philippine Association of Law Schools

94 denial of the taxpayer's request for reconsideration. Such letter amounts to a final decision on a disputed assessment and is thus appealable to the Court of Tax Appeals (CTA). (Commr. v.

Isabela Cultural Corp., G.R. No. 135210, July 11, 2001)

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise the decision shall become final, executory and demandable.||| (Rizal Commercial Banking Corp. v.

Commr., G.R. No. 168498, June 16, 2006)

The period to appeal from a decision of the Commissioner of Internal Revenue to the Court of Tax Appeals under Republic Act No. 1125 is jurisdictional and non-extendible and a taxpayer may not delay indefinitely a tax assessment by reiterating his original defenses over and over again, without substantial variation. (Filipinas Investment & Finance Corp. v. Commr.,

G.R. No. L-23501, May 16, 1967)

To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at the administrative level, would be to sanction a procedure whereby the Court — which is supposed to review administrative determinations — would not review, but determine and decide for the first time, a question not raised at the administrative forum. Thus, it is well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot be raised for the first time on appeal. (Commr. v. Wander Phils., Inc., G.R. No. 68375,

April 15, 1988)

By withdrawing the appeal, petitioner is deemed to have accepted the decision of the CTA. Petitioner cannot be allowed to circumvent the denial of its request for a tax credit by abandoning its appeal and filing a new claim. (Central Luzon Drug Corp. v. Commr., G.R. No.

181371, March 02, 2011)

Sec. 7 of RA 1125 provides that the CTA has exclusive appellate jurisdiction to review by appeal decisions of the CIR in cases involving disputed assessments. Likewise Sec. 4 of the 1997 NIRC [RA 8424] provides that the CIR has the power to decide disputed assessments subject to the exclusive appellate jurisdiction of the CTA. The latest law on the jurisdiction of the CTA under Sec. 7 of RA 9282 provides that the CTA exercises exclusive appellate jurisdiction to review by appeal decisions of the CIR in cases involving disputed assessments. Thus the CTA’s jurisdiction is to entertain an appeal only from a final decision or assessment of the CIR or in cases where the CIR has not acted within the period prescribed by the NIRC. So when the CIR has not issued an assessment, then there is nothing to protest or dispute. (Adamson vs. Court of Appeals, 588 SCRA 27) The period to appeal the decision or ruling of the RTC in local tax cases to CTA via petition for review is governed by Sec. 11 of RA 9282 and Sec. 3(a), Rule 8 of the Revised Rules of CTA, which is 30 days from receipt of decision or ruling. To appeal an adverse ruling of the RTC to the CTA the taxpayer must file a petition for review with the CTA within 30 days from receipt of the adverse decision or ruling. An extension may be granted for 15 days. With the several extensions asked the CTA can dismiss the petition. Failure to comply with Bar Ops Pilipinas 2015 Philippine Association of Law Schools

95 requirements would also be a ground to dismiss the petition. (City of Manila vs. Coca Cola Bottlers Phils., 595 SCRA 299) 2. Criminal cases a) Exclusive original jurisdiction b) Exclusive appellate jurisdiction in criminal cases B. Judicial procedures 1. Judicial action for collection of taxes a) Internal revenue taxes Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a taxpayer's request for reinvestigation before he can go to court for the purpose of collecting the tax assessed. On the contrary, Section 305 of the same Code withholds from all courts, except the Court of Tax Appeals under Section 11 of Republic Act 1125, the authority to restrain the collection of any national internal-revenue tax, fee or charge, thereby indicating the legislative policy to allow the Collector of Internal Revenue much latitude in the speedy and prompt collection of taxes. (Republic v. Lim Tian Teng Sons & Co., Inc., G.R. No. L-21731, March 31,

1966)

For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. (Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc., (now Sime Darby International Tire Co., Inc.), et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546; Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004), as well as their assessments. The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest peaceful, lawabiding citizens. Without such a legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. (Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008) Unreasonable investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. (Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004) For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection and the exceptions to the law on prescription should perforce be strictly construed. (Philippine Journalists Inc. v. Commr., G.R. No. 162852, December 16, 2004) Bar Ops Pilipinas 2015 Philippine Association of Law Schools

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The signatures of both the Commissioner and the taxpayer, are required for a waiver of the prescriptive period, thus a unilateral waiver on the part of the taxpayer does not suspend the prescriptive period. (Commissioner of Internal Revenue v. Court of Appeals, et al.,G.R. No. 115712, February 25, 1999) The act of requesting a reinvestigation alone does not suspend the running of the prescriptive period. The request for reinvestigation must be granted by the CIR. (Bank of

Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008) b) Local taxes (i) Prescriptive period 2. Civil cases a) Who may appeal, mode of appeal, effect of appeal (i) Suspension of collection of tax a) Injunction not available to restrain collection (ii) Taking of evidence (iii) Motion for reconsideration or new trial

It is true that petitioner could not move for new trial on the basis of newly discovered evidence because in order to have a new trial on the basis of newly discovered evidence, it must be proved that: (a) the evidence was discovered after the trial; (b) such evidence could not have been discovered and produced at the trial with reasonable diligence; (c) it is material, not merely cumulative, corroborative or impeaching; and (d) it is of such weight that, if admitted, will probably change the judgment. This does not mean however, that petitioner is altogether barred from having a new trial if the reasons put forth by petitioner could fall under mistake or excusable negligence. (Philippine Phosphate Fertilizer Corp. v. Commr., G.R. No.

141973, June 28, 2005)

Before the CTA En Banc could take cognizance of the petition for review concerning a case falling under its exclusive appellate jurisdiction, the litigant must sufficiently show that it sought prior reconsideration or moved for a new trial with the concerned CTA division. Procedural rules are not to be trifled with or be excused simply because their non-compliance may have resulted in prejudicing a party's substantive rights. (Commisioner of Customs v.

Marina Sales, Inc., G.R. No. 183868, November 22, 2010)

The Commissioner of Internal Revenue, not having clearly signified his final action on the disputed assessment, legally the period to appeal has not commenced to run. The request for reinvestigation and reconsideration was in effect considered denied by CIR when the latter filed a civil suit for collection of deficiency income. (Commissioner of Internal Revenue vs Union

Shipping Corporation and the Court of Tax Appeals, G.R. No. L-66160, May 21, 1990)

A letter of the BIR Commissioner reiterating to a taxpayer his previous demand to pay an assessment is considered a denial of the request for reconsideration or protest and is appealable to the Court of Tax Appeals. (Commr. v. Ayala Securities Corp., G.R. No. L-29485, March 31,

1976)

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b) Appeal to the CTA, en banc The petition for review to be filed with the CTA en banc as the mode for appealing a decision, resolution, or order of the CTA Division, under Section 18 of Republic Act No. 1125, as amended, is not a totally new remedy, unique to the CTA, with a special application or use therein. Accordingly, doctrines, principles, rules, and precedents laid down in jurisprudence by this Court as regards petitions for review and appeals in courts of general jurisdiction should likewise bind the CTA, and it cannot depart therefrom. (Santos v. People, et al, G. R. No. 173176, August 26, 2008) c) Petition for review on certiorari to the Supreme Court BOC committed procedural missteps and the decision of the CTA division has become final. The Supreme Court is without jurisdiction to review decisions rendered by a division of the CTA but the decision of the CTA en banc. Under Sec. 9 of RA 9282, a party affected by the ruling or decision of a division of the CTA may file an MR within 15 days. Sec. 11 of RA 9282 provides that if the MR is denied, a petition for review is filed with the CTA en banc. From an adverse ruling or decision from the CTA en banc, the appeal by way of petition for review on certiorari under Rule 45 is filed with the Supreme Court. Thus the Supreme Court has no jurisdiction to review the decision of a division of the CTA. (Com. of Customs v. Gelmart Industries, 579 SCRA 272) 3. Criminal cases a) Institution and prosecution of criminal actions Any subsequent satisfaction of the tax liability, by payment or prescription, will not operate to extinguish criminal liability, since the duty to pay the tax is imposed by statute independent of any attempt on the part of the taxpayer to evade payment. The failure of the government, therefore, to enforce by appropriate civil remedies the collection of the taxes, does not detract from its right criminally to prosecute violations of the Code. (People v. Tierra, G.R.

Nos. L-17177-80, December 28, 1964) (i)

Institution of civil action in criminal action

Section 222 of the NIRC specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. (Commr. v. Pascor Realty & Development Corp., G.R. No. 128315, June 29,

1999)

Since the civil liability is not deemed included in the criminal action, acquittal of the taxpayer in the criminal proceeding does not necessarily entail exoneration from his liability to pay the taxes. The acquittal in a criminal case cannot operate to discharge defendant from the duty of paying the taxes which the law requires to be paid, since that duty is imposed by

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98 statute prior to and independently of any attempts by payment. (Republic v. Patanao, G.R. No. L-22356, July 21, 1967)

the

taxpayer

to

evade

With regard to the tax proper, the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax, since that duty is imposed by statue prior to and independently of any attempts on the part of the taxpayer to evade payment. The obligation to pay the tax is not a mere consequence of the felonious acts charged in the information, nor is it a mere civil liability derived from crime that would be wiped out by the judicial declaration that the criminal acts charged did not exist. (Castro v. Collector of Internal Revenue, G.R. No. L-12174, April 26, 1962) b) Appeal and period to appeal (i) Solicitor General as counsel for the people and government officials sued in their official capacity c) Petition for review on certiorari to the Supreme Court C. Taxpayer’s suit impugning the validity of tax measures or acts of taxing authorities 1. Taxpayer’s suit, defined It is hornbook principle that a taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is wastage of public funds through the enforcement of an invalid or unconstitutional law. For a taxpayer's suit to prosper, two requisites must be met namely, (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed; and (2) the petitioner is directly affected by the alleged act. (LBP v. Cacayuran, G.R. No. 191667, April 17, 2013) What is a taxpayer’s suit? In the case of a taxpayer, he is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. Before he can invoke the power of judicial review, however, he must specifically prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he would sustain a direct injury as a result of the enforcement of the questioned statute or contract. It is not sufficient that he has merely a general interest common to all members of the public. At all events, courts are vested with discretion as to whether or not a taxpayer's suit should be entertained. This Court opts to grant standing to most of the petitioners, given their allegation that any impending transmittal to the Senate of the Articles of Impeachment and the ensuing trial of the Chief Justice will necessarily involve the expenditure of public funds. (Francisco, Jr. vs. Nagmamalasakit na mga Manananggol ng mga Manggagawang Pilipino, 415 SCRA 44) 2. Distinguished from citizen’s suit Taxpayers have been allowed to sue where there is a claim that public funds are illegally disbursed or that public money is being deflected to any improper purpose, or that public funds are wasted through the enforcement of an invalid or unconstitutional law. On the other hand, as citizens, petitioners have must fulfill the standing requirement given that the issues they Bar Ops Pilipinas 2015 Philippine Association of Law Schools

99 have raised may be classified as matters "of transcendental importance, of overreaching significance to society, or of paramount public interest." (Belgica v. Ochoa, G.R. No. 208566,

208493, 209251, L-20768, November 19, 2013)

What is a citizen’s suit? When suing as a citizen, the interest of the petitioner assailing the constitutionality of a statute must be direct and personal. He must be able to show, not only that the law or any government act is invalid, but also that he sustained or is in imminent danger of sustaining some direct injury as a result of its enforcement, and not merely that he suffers thereby in some indefinite way. It must appear that the person complaining has been or is about to be denied some right or privilege to which he is lawfully entitled or that he is about to be subjected to some burdens or penalties by reason of the statute or act complained of. In fine, when the proceeding involves the assertion of a public right, the mere fact that he is a citizen satisfies the requirement of personal interest. (Francisco, Jr. vs. Nagmamalasakit na mga Manananggol ng mga Manggagawang Pilipino, 415 SCRA 44) 3. Requisites for challenging the constitutionality of a tax measure or act of taxing authority a) Concept of locus standi as applied in taxation “Legal standing” or locus standi has been defined as a personal and substantial interest in the case such that the party has sustained or will sustain direct injury as a result of the governmental as that is being challenged. The gist of the question of standing is whether a party alleges “such personal stake in the outcome of the controversy as to assure the concrete adverseness which sharpens the presentation of issues upon which the court depends for illumination of difficult constitutional questions. To invest him with locus standi, the plaintiff has to adequately show that he is entitled to judicial protection and has a sufficient interest in the vindication of the asserted public right. In case of taxpayer’s suits, the party suing as a taxpayer must prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation. (Public Interest Center vs. Roxas, 513 SCRA 457) Locus standi, however, is merely a matter of procedure and it has been recognized that in some cases, suits are not brought by parties who have been personally injured by the operation of a law or any other government act but by concerned citizens, taxpayers or voters who actually sue in the public interest. Consequently, the Court, in a catena of cases, has invariably adopted a liberal stance on locus standi, including those cases involving taxpayers. The prevailing doctrine in taxpayers suits is to allow taxpayers to question contracts entered into by the national government or government-owned or controlled corporations allegedly in contravention of law. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that money is being deflected to any improper purpose, or that there is wastage of public funds through the enforcement of an invalid or unconstitutional law. Significantly, a taxpayer need not be a party to the contract to challenge its validity. (Abaya vs. Ebdane, Jr. 515 SCRA 720)

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100 b) Doctrine of transcendental importance What is “transcendental importance”? There being no doctrinal definition of transcendental importance, the following instructive determinants are instructive: (1) the character of the funds or other assets involved in the case, (2) the presence of a clear case of disregard of a constitutional or statutory prohibition by the public respondent agency or instrumentality of the government, and the (3) the lack of any other party with a more direct and specific interest in raising the questions being raised. The Court has adopted a liberal attitude on locus standi where the petitioner is able to craft an issue of transcendental significance to the people, as when the issues raised are of paramount importance to the public. (Francisco, Jr. vs. Nagmamalasakit na mga Manananggol ng mga Manggagawang Pilipino, 415 SCRA 44) Only a person who stands to be benefited or injured by the judgment in the suit or entitled to the avails of the suit can file a complaint or petition. Respondents claim that petitioner is not a proper party-in-interest as he was unable to show that “he has sustained or is in immediate or imminent danger of sustaining some direct and personal injury as a result of the execution and enforcement of the assailed contracts or agreements.” Moreover, they assert that not all government contracts can justify a taxpayer’s suit especially when no public funds were utilized in contravention of the Constitution or a law. We explicated in Chavez v. PCGG, 299 SCRA 744 (1998), that in cases where issues of transcendental public importance are presented, there is no necessity to show that petitioner has experienced or is in actual danger of suffering direct and personal injury as the requisite injury is assumed. We find our ruling in Chavez v. PEA, 384 SCRA 152 (2002), as conclusive authority on locus standi in the case at bar since the issues raised in this petition are averred to be in breach of the fair diffusion of the country’s natural resources and the constitutional right of a citizen to information which have been declared to be matters of transcendental public importance. Moreover, the pleadings especially those of respondents readily reveal that public funds have been indirectly utilized in the Project by means of Smokey Mountain Project Participation Certificates (SMPPCs) bought by some government agencies. Hence, petitioner, as a taxpayer, is a proper party to the instant petition before the court. (Chavez vs. NHA, 530 SCRA 235) c) Ripeness for judicial determination

PREPARED BY: UNIVERSITY OF SAN CARLOS PLAZA, ATHENA PLAZA, LADY LOVE JACILDO, JECCA

Bar Ops Pilipinas 2015 Philippine Association of Law Schools