Tax 1 Digest Compilation_1st meeting (Zarate) edited.pdf

[G.R. No. L-9408. October 31, 1956.] EMILIO Y. HILADO, Petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, Respondents. TOPIC: Nature of Internal Revenue Laws Facts: - On March 31, 1952, Petitioner filed his income tax return for 1951 with the treasurer of Bacolod City wherein he claimed, among other things, the amount of P12,837.65 as a deductible item from his gross income pursuant to General Circular No. V-123 issued by the Collector of Internal Revenue. -

On August 30, 1952, the Secretary of Finance, through the Collector of Internal Revenue, issued General Circular No. V-139 which not only revoked and declared void his general Circular No. V- 123 but laid down the rule that losses of property which occurred during the period of World War II from fires, storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible in the year of actual loss or destruction of said property.

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As a consequence, the amount of P12,837.65 was disallowed as a deduction from the gross income of Petitioner for 1951.

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NIRC provides that losses sustained are allowable as deduction only within the corresponding taxable year.

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Petitioner now contends that during the last war and as a consequence of enemy occupation in the Philippines “there was no taxable year” within the meaning of our internal revenue laws because during that period they were unenforceable.

ISSUES: What’s the nature of internal revenue laws? Are internal revenue laws suspended during the period of belligerent occupation? RULING: Our internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. As a matter of fact, income tax returns were filed during that period and income tax payment were effected and considered valid and legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy. “Furthermore, it is a legal maxim, that excepting that of a political nature, ‘Law once established continues until changed by some competent legislative power. It is not changed merely by change of sovereignty.’ Chamber of Real Estate and Builders’ Associations, Inc., v. The Hon. Executive Secretary Alberto Romulo, et al G.R. No. 160756. March 9, 2010 Topic: Scope of Taxation

Facts: - Petitioner Chamber of Real Estate and Builders’ Associations, Inc. (CREBA), an association of real estate developers and builders in the Philippines, questioned the validity of Section 27(E) of the Tax Code which imposes the minimum corporate income tax (MCIT) on corporations. - Under the Tax Code, a corporation can become subject to the MCIT at the rate of 2% of gross income, beginning on the 4th taxable year immediately following the year in which it commenced its business operations, when such MCIT is greater than the normal corporate income tax. If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. - CREBA claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account. Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not "realized gain." -

CREBA also sought to invalidate the provisions of RR No. 2-98, as amended, otherwise known as the Consolidated Withholding Tax Regulations, which prescribe the rules and procedures for the collection of CWT on sales of real properties classified as ordinary assets, on the grounds that these regulations: o Use gross selling price (GSP) or fair market value (FMV) as basis for determining the income tax on the sale of real estate classified as ordinary assets, instead of the entity’s net taxable income as provided for under the Tax Code; o Mandate the collection of income tax on a per transaction basis, contrary to the Tax Code provision which imposes income tax on net income at the end of the taxable period; o Go against the due process clause because the government collects income tax even when the net income has not yet been determined; gain is never assured by mere receipt of the selling price; and o Contravene the equal protection clause because the CWT is being charged upon real estate enterprises, but not on other business enterprises, more particularly, those in the manufacturing sector, which do business similar to that of a real estate enterprise.

Issues: 1. WON the imposition of MCIT is a violation of due process? 2. WON imposition of CWT on income from sales of real properties classified as ordinary assets constitutional?

Held: 1. The imposition of the MCIT is not a violation of due process. Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. 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 the common good.[33]
 


Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. 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.
 


As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it.[37] Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.
 


The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,[38] 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. There must be a factual foundation to such an unconstitutional taint. This merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive character.[ An income tax is arbitrary and confiscatory if it taxes capital, because it is income, and not capital, which is subject to income tax. However, MCIT is imposed on gross income which is computed by deducting from gross sales the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. (Perhaps this succeeding portion will no longer be discussed) Various safeguards were incorporated into the law imposing MCIT. Firstly, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the MCIT is imposed only on the 4th taxable year immediately following the year in which the corporation commenced its operations. Secondly, the law allows the carry-forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for the three immediately succeeding years. Thirdly, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses.

2. Yes. Despite the imposition of CWT on GSP or FMV, the income tax base for sales of real property classified as ordinary assets remains as the entity’s net taxable income as provided in the Tax Code, i.e., gross income less allowable costs and deductions. The seller shall file its income tax return and credit the taxes withheld by the withholding agent-buyer against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit. The use of the GSP or FMV as basis to determine the CWT is for purposes of practicality and convenience. The knowledge of the withholding agent-buyer is limited to the particular transaction in which he is a party. Hence, his basis can only be the GSP or FMV which figures are reasonably known to him. Also, the collection of income tax via the CWT on a per transaction basis, i.e., upon consummation of the sale, is not contrary to the Tax Code which calls for the payment of the net income at the end of the taxable period. The taxes withheld are in the nature of advance tax payments by a taxpayer in order to cancel its possible future tax obligation. They are installments on the annual tax which may be due at the end of the taxable year. The withholding agent-buyer’s act of collecting the tax at the time of the transaction, by withholding the tax due from the income payable, is the very essence of the withholding tax method of tax collection. On the alleged violation of the equal protection clause, the taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from singling out a particular class for taxation, or exemption, infringe no constitutional limitation. 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. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts. G.R. No. L-59431 July 25, 1984 ANTERO M. SISON, JR., Petitioner, vs. RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, Respondents. TOPIC: Scope of Taxation FACTS: - Petitioner filed a complaint for declaratory relief or prohibition proceeding on the validity of Section I of Batas Pambansa Blg. 135. The assailed provision further amends Section 21 of the National Internal Revenue Code of 1977,

which provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership, (f) adjusted gross income. -

Sison, as taxpayer, alleged that its provision (Section 1) unduly discriminated against him by the imposition of higher rates upon his income as a professional, that it amounts to class legislation, and that it transgresses against the equal protection and due process clauses of the Constitution as well as the rule requiring uniformity in taxation.

ISSUE: WON section I of BP 135 (amending section 21 of the NIRC) is constitutional. RULING: Marshall, Holmes Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. Taxes being the lifeblood of the government, their prompt and certain availability is of the essence. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of government." It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits. Adversely affecting as it does on property rights, both the due process and equal protection clauses maybe properly be invoked, as petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." In a separate opinion in Graves v. New York, Justice Frankfurter, after referring to it as an unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes." This is merely to emphasize that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court sits." So it is in the Philippines. There is a need for proof of such persuasive character as would lead to a conclusion that there was a violation of the due process and equal protection clauses. Absent such showing, the presumption of validity must prevail. 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. Where the differentitation conforms to the practical dictates of justice and equity, similar to the standards of equal protection, it is not discriminatory within the meaning of the clause and is therefore uniform. Taxpayers may be classified into different categories, such as recipients of compensation income as against professionals. Recipients of compensation income are not entitled to make deductions for income tax purposes as there is no practically no overhead expense, while professionals and businessmen have no uniform costs or expenses necessary to produce their income. There is ample justification to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

SARASOLA V TRINIDAD G.R No. 14595 October 11, 1919 Facts: Gregorio Sarasola filed this case for injunction against the Collector of Internal Revenue from the alleged illegal collection of taxes in the amount of P11, 739.29 in the CFI Manila. According to Sarasola, he was not engaged in the business of a commission merchant in Manila therefore he was not liable to pay the taxes and cannot comply to the demand of the Internal Revenue under protest. And he must be entitled to recover the interest for the illegal collection that the Commission did to him. Issue: Whether or not the provision prohibiting the court from granting an injunction to restrain the collection of taxes constitutional? Ruling: The Supreme Court held that public policy decrees that, since upon the prompt collection of revenue there depends the very existence of government itself, whatever determination shall be arrived at by the Legislature should not be interfered with, unless there be a clear violation of some constitutional inhibition. As said in Dows vs. The City of Chicago, supra, "It is upon taxation that the several states chiefly rely to obtain the means to carry on their respective governments, and it is of the utmost importance to all of them that the modes adopted to enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting the taxes, may derange the operations of government, and thereby cause serious detriment to the public." Or as said in Snyder vs. Marks, supra, "The system prescribed by the United States in regard to both customs duties and internal revenue taxes, of stringent measures, not judicial, to collect them, with appeals to specified tribunals and suits to recover back moneys illegally exacted, was a system of corrective justice, intended to be complete and enacted under the right belonging to the Government, to prescribe the conditions on which it would subject itself to the judgment of the courts in the collection of its revenues." Or as said in Tennesse vs. Sneed, supra, "The Government may fix the conditions upon which it will consent to litigate the validity of its original taxes." Or as said in a New York case, "The power of taxation being legislative, all the incidents are within the control of the Legislature." (Genet vs .City of Brooklyn [1885], 99 N.Y., 296.) Or as said by Chief Justice Marshall in McCulloch vs. Maryland, supra, "The people of a state give to their government a right of taxing themselves and their property, and as the exigencies of the Government cannot be limited, they prescribe no limit to the exercise of this right, resting confidently on the interest of the legislator and on the influence of the constituents over their representatives, to guard themselves against its abuse." (See to the same effect the Philippine case of De Villata vs. Stanley [1915], 32 Phil., 541; and Churchill and Tait vs. Concepcion [1916], 34 Phil., 969.) Applying these well-known principles to the case at bar, it would seem that the legislature has considered that a law providing for the payment of a tax with a right to bring a suit before a tribunal to recover back the same without interest is a full and adequate remedy for the aggrieved taxpayer. The disallowance of interest in such case, like the other steps prescribed as conditional to recovery, has been made one of the conditions which the lawmakers have seen fit to attach to the remedy provided. As the Legislature in the exercise of its wide discretionary power, has deemed the remedy provided in section 1579 of the Administrative Code to be an adequate mode of testing the validity of an internal revenue tax and has willed that such a remedy shall be exclusive, the courts not only owe it to a coordinate branch of the government to respect the opinion thus

announced, but have no right to interfere with the enforcement of such a law. Therefore, Sarasola is not entitled to avail injunction against the Collector of Internal Revenue. Commissioner of Internal Revenue vs. Algue Inc. GR No. L-28896 | Feb. 17, 1988 Facts: Algue Inc. is a domestic corporation engaged in engineering, construction and other allied activities. On Jan. 14, 1965, the corporation received a letter from the CIR regarding its delinquency income taxes from 1958-1959, amounting to P83, 183.85. A letter of protest or reconsideration was filed by Algue Inc on January 18, 1965. On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its counsel, Atty. Guevara, who refused to receive it on the ground of the pending protest. Since the protest was not found on the records, a file copy from the corporation was produced and given to BIR Agent Reyes, who deferred service of the warrant. On April 7, Atty. Guevara was informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. On April 23, Algue filed a petition for review of the decision of the CIR with the Court of Tax Appeals CIR contentions: - the claimed deduction of P75, 000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense - payments are fictitious because most of the payees are members of the same family in control of Algue and that there is not enough substantiation of such payments CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company. Issue: W/N the Collector of Internal Revenue correctly disallowed the P75, 000.00 deductions claimed by Algue as legitimate business expenses in its income tax returns Ruling: Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance, made in accordance with law. RA 1125: the appeal may be made within thirty days after receipt of the decision or ruling challenged During the intervening period, the warrant was premature and could therefore not be served. Originally, CIR claimed that the 75K promotional fees to be personal holding company income, but later on conformed to the decision of CTA There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. CTA also found, after examining the evidence, that no distribution of dividends was involved CIR suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction Algue Inc. was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required at the end of the year,

when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. This arrangement was understandable in view of the close relationship among the persons in the family corporation The amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to Algue Inc. was P125K. After deducting the said fees, Algue still had a balance of P50, 000.00 as clear profit from the transaction. The amount of P75, 000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. Sec. 30 of the Tax Code: allowed deductions in the net income – Expenses - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered xxx The burden is on the taxpayer to prove the validity of the claimed deduction. In this case, Algue Inc. has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. Taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. Taxation must be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. Algue Inc.’s appeal from the decision of the CIR was filed on time with the CTA in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by Algue Inc. was permitted under the Internal Revenue Code and should therefore not have been disallowed by the CIR. Abakada Guro Party List v. Ermita G.R. No. 168056 September 1, 2005 Facts: On May 24, 2005, the President signed into law Republic Act 9337 or the VAT Reform Act. Before the law took effect on July 1, 2005, the Court issued a TRO enjoining government from implementing the law in response to a slew of petitions for certiorari and prohibition questioning the constitutionality of the new law. The challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6: “That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to 12%, after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1½%)

Petitioners allege that the grant of stand-by authority to the President to increase the VAT rate is an abdication by Congress of its exclusive power to tax because such delegation is not covered by Section 28 (2), Article VI Constitution. They argue that VAT is a tax levied on the sale or exchange of goods and services which can’t be included within the purview of tariffs under the exemption delegation since this refers to customs duties, tolls or tribute payable upon merchandise to the government and usually imposed on imported/exported goods. They also said that the President has powers to cause, influence or create the conditions provided by law to bring about the conditions precedent. Moreover, they allege that no guiding standards are made by law as to how the Secretary of Finance will make the recommendation. Issue: Whether or not the RA 9337's stand-by authority to the Executive to increase the VAT rate, especially on account of the recommendatory power granted to the Secretary of Finance, constitutes undue delegation of legislative power? Held: 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 is 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. It is the nature of the power and not the liability of its use or the manner of its exercise which determines the validity of its delegation. The exceptions are: (a) delegation of tariff powers to President under Constitution (b) delegation of emergency powers to President under Constitution (c) delegation to the people at large (d) delegation to local governments (e) delegation to administrative bodies For the delegation to be valid it must be complete and it must fix a standard. A sufficient standard is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. In this case, it is not a delegation of legislative power BUT a delegation of ascertainment of facts upon which enforcement and administration of the increased rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive. No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word SHALL is used in the common proviso. The use of the word SHALL connote a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a duty, which cannot be evaded by the President. It is a clear directive to impose the 12% VAT rate when the specified conditions are present. Congress just granted the Secretary of Finance the authority to ascertain the existence of a fact--- whether by December 31, 2005, the VAT collection as a percentage of GDP of the previous year exceeds 2 4/5 % or the national government deficit as a percentage of GDP of the previous year exceeds one and 1½%. If either of these two

instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the President. 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. The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is present. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently the only way in which the legislative process can go forward. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible. Congress did not delegate the power to tax but the mere implementation of the law. DIAZ AND TIMBOL VS. SECRETARY OF FINANCE AND THE COMMISSIONER OF INTERTNAL REVENUE FACTS: Petitioners Renato V. Diaz and Aurora Ma. F. Timbol filed this petition for declaratory relief assailing the validity of the impending imposition of VAT by the BIR on the collections of tollway operators. They allege that the BIR attempted during the administration of PGMA to impose VAT on toll fees. The imposition was deferred. But, upon PNoy’s assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined. Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of sale of services that are subject to VAT; that a toll fee is a users tax, not a sale of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since VAT was never factored into the formula for computing toll fees, its imposition would violate the non-impairment clause of the constitution. On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation of the VAT. Later, the Court issued another resolution treating the petition as one for prohibition. ISSUE: Among the issues in this case is W/N the imposition of VAT on tollway operation is not administratively feasible and cannot be implemented.

HELD: NO. Petitioners assert that the substantiation requirements for claiming input VAT make the VAT on tollway operations impractical and incapable of implementation. They cite the fact that, in order to claim input VAT, the name, address and tax identification number of the tollway user must be indicated in the VAT receipt or invoice. The manner by which the BIR intends to implement the VAT by rounding off the toll rate and putting any excess collection in an escrow account is also illegal, while the alternative of giving change to thousands of motorists in order to meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on tollway operations is not administratively feasible. Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired. Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the Constitution. Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway operations. Any declaration by the Court that the manner of its implementation is illegal or unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate hearing provides some clue as to how the BIR intends to go about it, the facts pertaining to the matter are not sufficiently established for the Court to pass judgment on. Besides, any concern about how the VAT on tollway operations will be enforced must first be addressed to the BIR on whom the task of implementing tax laws primarily and exclusively rests. The Court cannot preempt the BIR’s discretion on the matter, absent any clear violation of law or the Constitution.

ROMEO P. GEROCHI at. Al. vs. DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY COMMISSION (ERC), NATIONAL POWER CORPORATION (NPC), POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT GROUP (PSALM Corp.), STRATEGIC POWER UTILITIES GROUP (SPUG), and PANAYELECTRIC COMPANY INC. (PECO) FACTS: Electric Power Industry Reform Act of 2001 (EPIRA) was enacted by the Congress on June 8, 2001 and it took effect on June 26, 2001. EPIRA imposes a universal charge on all electricity and end-users for the purposes of paying stranded debts in excess of the amount assumed by the National Government and stranded contract costs of NPC and as well as qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry, among others. Petitioners allege that this universal charge is a tax, therefore amounting to undue delegation of legislative power to tax on the part of ERC.

ISSUE: W/N the universal charge being imposed by EPIRA is a tax. HELD: NO. The power to tax is an incident of sovereignty. It is based on the principle that taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need. On the other hand, police power is the power of the state to promote public welfare by restraining and regulating the use of liberty and property. It is the most pervasive, the least limitable, and the most demanding of the three fundamental powers of the State. The pivotal distinction between these two powers rests in the purpose for which the charge is made. 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. In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power, particularly its regulatory dimension, is invoked. Looking at the purposes of EPIRA, it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise of the State's police power. Public welfare is surely promoted. Moreover, the Special Trust Fund feature of the universal charge reasonably serves and assures the attainment and perpetuity of the purposes for which the universal charge is imposed (e.g. to ensure the viability of the country’s electric power industry), further boosting the position that the same is an exaction primarily in pursuit of the State’s police objectives MATALIN COCONUT CO. INC. VS. THE MUNICIPAL COUNCIL OF MALABANG FACTS: Municipal Council of Malabang, Lanao del Sur enacted Municipal Ordinance No. 45-46, entitled "AN ORDINANCE IMPOSING A POLICE INSPECTION FEE OF P.30 PER SACK OF CASSAVA STARCH PRODUCED AND SHIPPED OUT OF THE MUNICIPALITY OF MALABANG AND IMPOSING PENALTIES FOR VIOLATIONS THEREOF." The ordinance made it unlawful for any person, company or group of persons "to ship out of the Municipality of Malabang, cassava starch or flour without paying to the Municipal Treasurer or his authorized representatives the corresponding fee fixed by (the) ordinance." It imposed a "police inspection fee" of P.30 per sack of cassava starch or flour, which shall be paid by the shipper before the same is transported or shipped outside the municipality. Any person or company or group of individuals violating the ordinance "is liable to a fine of not less than P100.00, but not more than P1,000.00, and to pay Pl.00 for every sack of flour being illegally shipped outside the municipality, or to suffer imprisonment of 20 days, or both, in the discretion of the court. ISSUE: W/N the Municipal Ordinance is unconstitutional and therefore null and void. HELD: NO. This Court has construed the grant of power to tax under the Local Autonomy Act as sufficiently plenary to cover "everything, excepting those which are

mentioned" therein, subject only to the limitation that the tax so levied is for public purposes, just and uniform. The amount collected under the ordinance in question partakes of the nature of a tax, although denominated as "police inspection fee" since its undeniable purpose is to raise revenue. The municipal council is authorized to impose such. However, this Municipal Ordinance should be stricken down for being unjust and unreasonable, therefore invalid. It has been proven that the only service rendered by the Municipality of Malabang, by way of inspection, is for the policeman to verify from the driver of the trucks of the petitioner passing by at the police checkpoint the number of bags loaded per trip which are to be shipped out of the municipality based on the trip tickets for the purpose of computing the total amount of tax to be collect (sic) and for no other purpose. The pretention of respondents that the police, aside from counting the number of bags shipped out, is also inspecting the cassava flour starch contained in the bags to find out if the said cassava flour starch is fit for human consumption could not be given credence by the Court because, aside from the fact that said purpose is not so stated in the ordinance in question, the policemen of said municipality are not competent to determine if the cassava flour starch are fit for human consumption. LUTZ vs. ARANETA
 Facts: Commonwealth Act No. 567, otherwise known as Sugar Adjustment Act was promulgated in 1940 “to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the United States market and the imposition of export taxes.” Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under Sec.3 of the Act, alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in plaintiff’s opinion is not a public purpose for which a tax may be constitutionally levied. The action has been dismissed by the Court of First Instance. Issue: Whether or not the tax imposed is constitutional. Held: Yes. The act is primarily an exercise of the police power. It is shown in the Act that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that “inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.” The funds raised under the Act should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected. It may be that other industries are also in need of similar protection; but the legislature is not required by the Constitution to adhere to a policy of “all or none.” NTC vs. CA Topic: Comparison of Police Power and Eminent Domain

FACTS: In 1988, NTC served on PLDT an assessment notice and demand for payment of supervision and regulation fees and permit fees when NTC approved the latter’s equity participation in the Fiber Optic Interpacific Cable Systems and X-5 Service Improvement and Expansion program. PLDT challenged the assessment, claiming that: [a] the assessments were made to raise revenue and not as mere reimbursements for actual regulatory expenses, [b] the assessment should only be based on the par values of PLDT’s outstanding capital stock, [c] that NTC did not render any supervisory or regulatory activity and incurred no expenses relating thereto. NTC denied the protest and the motion for reconsideration. CA modified the disposition and asked NTC to recomputed its assessments and demands for payment of permit fees. CA held that they should be computed at 50 for each P100 or fraction thereof, regardless of any regulatory service or expense incurred. The Annual Supervision and Regulation fees were also to be recomputed based on the par value of the capital stock subscribed excluding stock dividends, premiums or capital in excess of par. NTC appealed. Simply put, NTC submits that the fee under Sec40[e] should be based on the Market Value of PLDT’s outstanding capital stock inclusive of stock dividends and premium, and not on the Par Value of PLDT’s capital stock excluding stock dividends and premium, as contended by PLDT. ISSUE: W/N THE CA ERRED IN HOLDING THAT THE COMPUTATION OF SUPERVISION AND REGULATION FEES UNDER SEC40[F] OF THE PUBLIC SERVICE ACT SHOULD BE BASED ON THE PAR VALUE OF THE SUBSCRIBED CAPITAL STOCK? HELD: YES. The basis for computation of the fee to be charged by NTC to PLDT is the capital stock subscribed or paid and not, alternatively, the property and equipment, as held in PLDT v PSC. It bears stressing that it is not the NTC that imposed such fee but the legislature itself. Since Congress has the power to exercise the State’s inherent powers of Police Power, Eminent Domain and Taxation, the distinction between police power and the power to tax, which could be significant if the exercising authority were mere political subdivisions (since delegation by it to such political subdivisions of one power does not necessarily include the other), would not be of any moment when Congress itself exercises the power. Congress has the power to exercise the State’s inherent powers of Police Power, Eminent Domain and Taxation. The distinction between police power and the power to tax, which could be significant if the exercising authority were mere political subdivisions, would not be of any moment when Congress itself exercises the power. All that is to be done would be to apply and enforce the law when sufficiently definitive and not constitutionally infirm. In the same way the PLDT v PSC rejected the “value of the property and equipment: as being the basis for the fee imposed, so also must the court disallow the idea of computing the fee “on the Par Value of PLDT’s capital stock subscribed or paid excluding stock dividends, premiums, or capital in excess of par.” Neither is the

assessment made by the NTC on the basis of the Market Value of the subscribed or paid-in capital stock acceptable since it is itself a derivation from the explicit language of the law. REPUBLIC vs. PHIL. RABBIT BUS LINES, INC.

Police power which is used to restrict rights of liberty and property carries with it the undeniable power to collect a regulatory fee. Unlike a tax, it has not for its object the raising of revenue but looks rather to the enactment of specific measures that govern the relations not only as between individuals but also as between private parties and the political society. The registration fee which defendant-appellee had to pay was imposed by Section 8 of the Revised Motor Vehicle Law. The conclusion is difficult to resist therefore that the Motor Vehicle Act requires the payment not of a tax but of a registration fee under the police power. Hence the inapplicability of the section relied upon by defendantappellee under the Back Pay Law. It is not held liable for a tax but for a registration fee. It therefore cannot make use of a backpay certificate to meet such an obligation.

Topic: Definition of Taxes FACTS: Defendant-appellee, as the registered owner of 238 motor vehicles, paid to the Motor Vehicles Office in Baguio the amount of P78,636.17, corresponding to the second installment of registration fees for 1959, not in cash but in the form of negotiable certificate of indebtedness, the defendant being merely an assignee and not the backpay holder. The Republic sought the payment of such amount with surcharges plus the legal rate of interest from the filing thereof and a declaration of the nullity of the use of such negotiable certificate of indebtedness to satisfy its obligation. Republic urges that defendant bus firm being merely an assignee of the negotiable certificates of indebtedness in question, it could not use the same in payment of taxes.

What is thus most apparent is that where the legislative body relies on its authority to tax it expressly so states, and where it is enacting a regulatory measure, it is equally explicit.

lower court: dismissing a complaint by plaintiff-appellant Republic of the Philippines, seeking the invalidation of the payment by defendant-appellee Philippine Rabbit Bus Lines, Inc. for the registration fees of its motor vehicles in the sum of P78,636.17, in the form of such negotiable backpay certificates of indebtedness. ISSUE: whether or not the acceptance of the negotiable certificates of indebtedness tendered by defendant bus firms to and accepted by the Motor Vehicles Office of Baguio City and the corresponding issuance of official receipts therefor acknowledging such payment by said office is valid and binding
 HELD: The decision of November 24, 1965 is reversed and defendant-appellee ordered to pay the sum of P78,636.17. Court believes, runs counter to the recitals appearing on the said certificates which states that the Republic of the Philippines hereby acknowledges to (name) or assigns x x x”, legally allowing the assignment of backpay rights.
 If a registration fee were a tax, then what was done by defendant-appellee was strictly in accordance with law and its nullity, as sought by plaintiff-appellant Republic cannot be decreed. But is it? Tax refers to a financial obligation imposed by a state on persons, whether natural or juridical, within its jurisdiction, for property owned, income earned, business or profession engaged in, or any such activity analogous in character for raising the necessary revenues to take care of the responsibilities of government. According to Cooley: Taxes are the enforced proportional contributions from persons and property levied by the state by virtue of its sovereignty for the support of government and for all public needs As distinguished from other pecuniary burdens, the differentiating factor is that the purpose to be subserved is the raising of revenue. A tax then is neither a penalty that must be satisfied or a liability arising from contract

There is nothing to stand in the way, therefore, of the collection of the registration fees from defendant-appellee. CALTEX PHILIPPINES VS CA
 G.R. 925585 MAY 8, 1992
 


FACTS: • In 1989, COA sent a letter to Caltex directing it to remit to OPSF its collection of the additional tax on petroleum authorized under PD 1956 and pending such remittance, all of its claims from the OPSF shall be held in abeyance. • Petitioner requested COA for the early release of its reimbursement certificates from the OPSF covering claims with the Office of Energy Affairs. • COA denied petitioner's request for the early release of the reimbursement certificates from the OPSF and repeated its earlier directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action on the reimbursement claims. ISSUE: Can CPI offset any amount that it may be required under the law to remit to the OPSF against any amount that it may receive by way of reimbursement?
 RULING:
 No. It is a settled rule that a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually debtors and creditors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. In respect to the taxes for the OPSF, the oil companies merely act as agents for the Government in the latter's collection since the taxes are, in reality, passed unto the end-users –– the consuming public. In that capacity, the petitioner, as one of such companies, has the primary obligation to account for and remit the taxes collected to the administrator of the OPSF. This duty stems from the fiduciary relationship between the two; petitioner certainly cannot be considered merely as a debtor. In

respect, therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise legally feasible. Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors of each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. ENGRACIO FRANCIA vs. INTERMEDIATE APPELLATE COURT
 G.R. No. L-67649, June 28, 1988


•

FACTS: • Engracio Francia is the registered owner of a residential lot and a two-story house located in Pasay City. • On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic for the sum of P4,116.00. • Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. • Thus, on December 5, 1977, his property was sold at public auction pursuant the Real Property Tax Code in order to satisfy a tax delinquency of P2, 400.00. • Ho Fernandez was the highest bidder for the property. • Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas. • On March 3, 1979, Francia received a notice of hearing “In re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT and the issuance in his name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds. • On March 20, 1979, Francia filed a complaint to annul the auction sale. • The lower court rendered a decision against his favor and this was affirmed by the Intermediate Appellate Court. • Hence, this petition for review. ISSUE:
 Whether or not the tax delinquency of P2,400.00 was set-off by the amount of P4,116.00 which the government is indebted to the former. 


RULING:
 No. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax is being collected. The collection of a tax cannot await the results of a lawsuit against the government. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on.




PHILEX MINING vs CIR
 GR 125704, August 28, 1998
 FACTS: • On August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821.982.52. • Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years

•

• • •

1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund should be applied against the tax liabilities BIR, in a letter dated September 7, 1992, stated that these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. On November 6, 1992, Philex raised the issue to the Court of Tax Appeals. Inh the course of the proceeding, BIR issued Tax Credit which effectively lowered the latter's tax obligation to P110,677,688.52. But, despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus interest. Philex appealed the decision of CTA to CA. Nontheless, CA affirmed the decision of CTA. A few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994 Hence, this petition.

ISSUE: Can tax be subject for set-off?
 


RULING: No. Tax cannot be the subject for compensation for simple reason that the government and the tax payer are not mutual creditors and debtors of each other. Debts are due in the government in its’ corporate capacity while taxes are due to the government in its’ sovereign capacity. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. We cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. Tax vs. License Fees Progressive Dev. Corp. vs. QC (1989) FACTS: • Petitioner - owner and operator of a public market known as the "Farmers Market & Shopping Center" • 24 December 1969 – QC City Council adopted Ordinance No. 7997, Series of 1969, otherwise known as the Market Code of Quezon City. o Sec. 3. Supervision Fee.- Privately owned and operated public markets shall submit monthly to the Treasurer's Office, a certified list of stallholders showing the amount of stall fees or rentals paid daily by each stallholder, ... and shall pay 10% of the gross receipts from stall rentals to the City, ... , as supervision fee. Failure to submit said list and to pay the corresponding amount within the period herein prescribed shall subject the operator to the penalties provided in this Code ... including revocation of permit to operate • Market Code was thereafter amended by Ordinance No. 9236, Series of 1972, on 23 March 1972 o SECTION 1. There is hereby imposed a five percent (5 %) tax on gross receipts on rentals or lease of space in privately-owned public markets in Quezon City.

SECTION 3. For the effective implementation of this Ordinance, owners of privately owned public markets shall submit ... a monthly certified list of stallholders of lessees of space in their markets showing ... : a. name of stallholder or lessee; b. amount of rental; c. period of lease, indicating therein whether the same is on a daily, monthly or yearly basis. o SECTION 4. ... In case of consistent failure to pay the percentage tax for the (3) consecutive months, the City shall revoke the permit of the privately-owned market to operate and/or take any other appropriate action or remedy allowed by law for the collection of the overdue percentage tax and surcharge. • 15 July 1972 – Petitioner filed a Petition for Prohibition with Preliminary Injunction against respondent on the ground that the supervision fee or license tax imposed by the said ordinances is in reality a tax on income which respondent may not impose, the same being expressly prohibited by Republic Act No. 2264, as amended. • Respondent’s Answer: it had authority to enact the questioned ordinances, maintaining that the tax on gross receipts imposed therein is not a tax on income. • LC: DISMISSED the petition ruling that the questioned imposition is not a tax on income, but rather a privilege tax or license fee which local governments, like respondent, are empowered to impose and collect. ISSUE: Whether the tax imposed by respondent on gross receipts of stall rentals is properly characterized as partaking of the nature of an income tax or, alternatively, of a license fee. o

HELD: LICENSE FEE • The 5% tax imposed in the city ordinance constitutes a license tax or fee for the regulation of the business in which the petitioner is engaged. • Republic Act No. 537 (Revised Charter of Quezon City) authorizes the City Council to provide for the levy and collection of taxes and other city revenues and apply the same to the payment of city expenses in accordance with appropriations and To tax, fix the license fee, and regulate the business of the following: ... preparation and sale of meat, poultry, fish, game, butter, cheese, lard vegetables, bread and other provisions. • The scope of the legislative authority conferred upon the QC City Council in respect of businesses like that of the petitioner, is comprehensive: the grant of authority is not only" [to] regulate" and "fix the license fee," but also " to tax". • The term "tax" frequently applies to all kinds of exactions of monies, which become public funds. It is often loosely used to include levies for revenue as well as levies for regulatory purposes such that license fees are frequently called taxes although license fee is a legal concept distinguishable from tax: o License Fee - is imposed in the exercise of police power primarily for purposes of regulation. If regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. o Tax - is imposed under the taxing power primarily for purposes of raising revenues. If the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax.

•

To be considered a license fee, the imposition questioned must relate to an occupation or activity that so engages the public interest in health, morals, safety and development as to require regulation for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation but also its incidental consequences as well. When an activity, occupation or profession is of such a character that inspection or supervision by public officials is reasonably necessary for the safeguarding and furtherance of public health, morals and safety, or the general welfare, the legislature may provide that such inspection or supervision or other form of regulation shall be carried out at the expense of the persons engaged in such occupation or performing such activity, and that no one shall engage in the occupation or carry out the activity until a fee or charge sufficient to cover the cost of the inspection or supervision has been paid. Accordingly, a charge of a fixed sum, which bears no relation at all to the cost of inspection and regulation, may be held to be a tax rather than an exercise of the police power.

Tax vs. Special Assessments (special levies under LocGov) Apostolic Prefect vs. Treasurer of Baguio (Just got this from the net. Original text in Spanish) FACTS: In 1937, an ordinance (Ordinance No. 137: Special Assessment List, City of Baguio) was passed in the City of Baguio. The said ordinance sought to assess properties of property owners within the defined city limits. The Apostolic Prefect of Mt. Province (APMP), on the other hand, is a religious corporation duly established under Philippine laws. Pursuant to the ordinance, it paid a total amount of P1,019.37 in protest. APMP later averred that it should be exempt from the said special contribution since as a religious institution, it has a constitutionally guaranteed right not to be taxed including its properties. ISSUE: Whether or not APMP is exempt from taxes. HELD: No. In the first place, the ordinance was in the nature of an assessment and not a taxation. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. Based on Justice Cooley’s words: While the word ‘tax’ in its broad meaning, includes both general taxes and special assessments, and in a general sense a tax is an assessment, and an assessment is a tax, yet there is a recognized distinction between them in that assessment is confined to local impositions upon property for the payment of the cost of public improvements in its immediate vicinity and levied with reference to special benefits to the property assessed. The differences between a special assessment and a tax are that (1) a special assessment can be levied only on land; (2) a special assessment cannot (at least in most states) be made a personal liability of the person assessed; (3) a special assessment is based wholly on benefits; and (4) a special assessment is exceptional both as to time and locality. The imposition of a charge on all property, real and personal, in a prescribed area, is a tax and not an assessment, although the purpose is to make a local improvement on a street or highway. A charge imposed only on

property owners benefited is a special assessment rather than a tax notwithstanding the statute calls it a tax.

Further, the imposition of VAT on toll fees would have very minimal effect on motorists using the tollways.

In the case at bar, the Prefect cannot claim exemption because the assessment is not taxation per se but rather a system for the benefits of the inhabitants of the city.

In their reply to the governments’ comment, petitioners point out that tollway operators cannot be regarded as franchise grantees under the NIRC since they do not hold legislative franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any excess collection in an escrow account. But this would be illegal since only the Congress can modify VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010, which directs toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this reason, the VAT on toll fees cannot be implemented.

Tax vs. Tolls Diaz and Timbol vs. Secretary of Finance (2011) FACTS: Petitioners: DIAZ - sponsored the approval of Republic Act 7716 (the 1994 EVAT Law) and Republic Act 8424 (1997 NIRC) at the House of Representatives. TIMBOL - served as Assistant Secretary of the Department of Trade and Industry and consultant of the Toll Regulatory Board in the past administration. Petitioners filed a petition for declaratory relief assailing the validity of the impending imposition of VAT by the BIR on the collections of toll way operators. They claim that since VAT would result in increased toll fees, they have an interest as regular users of toll ways in stopping the BIR action. Petitioners alleged that the BIR attempted during the administration of President Arroyo to impose VAT on toll fees, which was deferred due to the consistent opposition of Diaz and other sectors to such move. However, during President Aquino’s term, (2010) the BIR revived the idea and would impose the challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined. Petitioners hold the view that when the Congress enacted the NIRC, it did not intend to include toll fees within the meaning of sale of services that are subject to VAT; that a toll fee is a users tax, not a sale of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since VAT was never factored into the formula for computing toll fees, its imposition would violate the non-impairment clause of the constitution. The Court issued a TRO, enjoining the implementation of the VAT. The OSG filed the government’s comment averring that the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway operations, except where the law provides otherwise; that the Court should seek the meaning and intent of the law from the words used in the statute; and that the imposition of VAT on tollway operations has been the subject as early as 2003 of several BIR rulings and circulars. Also, it argued that petitioners have no right to invoke the non-impairment of contracts clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between the government and tollway operators. At any rate, the non-impairment clause cannot limit the States sovereign taxing power, which is generally read into contracts. Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights of tollway operators to a reasonable rate of return will be impaired by the VAT since this is imposed on top of the toll rate.

ISSUE: WON toll fee is a users tax and to impose VAT on toll fees is tantamount to taxing a tax. HELD: NO. Fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. 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, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax. 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. VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. 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 sellers liability but merely the burden of the VAT. E. PENALTIES NDC vs CIR 151 SCRA 472 Facts: NDC entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of twelve ocean-going vessels. NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. The NDC went to the Court of Tax Appeals. The BIR was sustained by the CTA. The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision because all the related activities — the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC — were done in Tokyo. The law, however, does not speak of activity but of

"source," which in this case is the NDC. This is a domestic and resident corporation with principal offices in Manila

exemptions cannot be merely implied but must be categorically and unmistakably expressed.

Issue: W/N the Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code

*penalties ruling

Held: Yes, SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise; It is quite apparent, under the terms of the law, that the Government's right to levy and collect income tax on interest received by foreign corporations not engaged in trade or business within the Philippines is not planted upon the condition that 'the activity or labor — and the sale from which the (interest) income flowed had its situs' in the Philippines. The law specifies: 'Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or activity' of non-resident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income. There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the promissory notes of the NDC were government securities exempt from taxation under Section 29(b)[4] of the Tax Code, reading as follows:

Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact, such undertaking was made by the government in consonance with and certainly not against the following provisions of the Tax Code: Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but without diminution of its taxing power under existing laws. In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As such, it is governed in its proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws. The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold. In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus:

(b) Exclusion from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this Title:

Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)

xxx

Classification of Taxes According to Burden or Incidence (Direct or Indirect)

SEC. 29. Gross Income. — xxxx xxx xxx xxx

xxx

xxx

(4) Interest on Government Securities. — Interest upon the obligations of the Government of the Republic of the Philippines or any political subdivision thereof, but in the case of such obligations issued after approval of this Code, only to the extent provided in the act authorizing the issue thereof. (As amended by Section 6, R.A. No. 82) The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such securities. There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear waiver therein of the right to tax interests. Tax

MACEDA vs. MACARAIG, JR 223 SCRA 217 June 8, 1993 Facts: This matter of indirect tax exemption of the private respondent National Power Corporation (NPC) is brought to this Court a second time. Unfazed by the Decision We promulgated on May 31, 1991 petitioner Ernesto Maceda asks this Court to reconsider said Decision. A Chronological review of the relevant NPC laws, specially with respect to its tax exemption provisions. 1. On November 3, 1936, Commonwealth Act No. 120: creating the National Power Corporation. The main source of funds for the NPC was the flotation of bonds in the capital markets 4 and these bonds...“issued under the authority of this Act shall be exempt from the payment of all taxes by the Commonwealth of the Philippines…”

2. On June 24, 1938, C.A. No. 344, the provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted. 3. On September 30, 1939, C.A. No. 495, the provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted. 4. On June 4, 1949, Republic Act No. 357, any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges, contributions and restrictions of the Republic of the Philippines 5. On the same date, R.A. No. 358, to facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes. 6. On July 10, 1952, R.A. No. 813 amended R.A. No. 357. The tax provision as stated in R.A. No. 357, was not amended. 7. On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real estate taxes. 8. On September 8, 1955, R.A. No. 1397, the tax exemption provision related to the payment of this total indebtedness was not amended nor deleted. 9. On June 13, 1958, R.A. No. 2055, the tax provision related to the repayment of loans was not amended nor deleted. 10. On June 18, 1960, R.A. No 2641 converted the NPC from a public corporation into a stock corporation. No tax exemption was incorporated in said Act. 11. On June 17, 1961, R.A. No. 3043. No tax provision was incorporated in said Act. 12. On June 17, 1967, R.A. No 4897. No tax provision was incorporated in said Act. 13. On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC. The bonds issued shall be exempt from the payment of all taxes. As to the foreign loans the NPC was authorized to contract, shall also be exempt from all taxes, 14. On January 22, 1974, P.D. No. 380…shall also be exempt from all direct and indirect taxes, 15. On February 26, 1970, P.D. No. 395, no tax exemption provision was amended, deleted or added. 16. On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated annually to cover the unpaid subscription of the Government in the NPC authorized capital stock, which amount would be taken from taxes accruing to the General Funds of the Government, proceeds from loans, issuance of bonds, treasury bills or notes to be issued 17. On May 27, 1976 P.D. No. 938, declared exempt from the payment of all forms of taxes… 18. On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to imports 19. On July 30, 1977, P.D. 1177, All units of government, including governmentowned or controlled corporations, shall pay income taxes, customs duties and other taxes and fees are imposed under revenues laws: provided, that organizations otherwise exempted by law from the payment of such taxes/duties may ask for a subsidy from the General Fund 20. On July 11, 1984, P.D. No. 1931, all exemptions from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of governmentowned or controlled corporations including their subsidiaries, are hereby withdrawn. 21. On December 17, 1986, E.O. No. 93 was issued with a view to correct presidential restoration or grant of tax exemption to other government and private entities without benefit of review by the Fiscal Incentives Review Board, “WHEREAS, in addition to those tax and duty exemption privileges were restored by the Fiscal Incentives Review Board (FIRB), a number of affected entities, government and private, had their tax and duty exemption privileges restored”

Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC. Issue: W/N NPC is exempted to pay Indirect Income Tax Held: Yes. Classifications or kinds of Taxes: According to Persons who pay or who bear the burden: a. Direct Tax — that where the person supposed to pay the tax really pays it. WITHOUT transferring the burden to someone else. Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax), residence tax, immigration tax b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the consumer who ultimately pays for it, not as a tax, but as a part of the purchase price. Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the tariff and customs indirect taxes (import duties, special import tax and other dues) A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to be completely tax exempt from all forms of taxes — direct and indirect. P.D. No. 380 added phrase "directly or indirectly," P.D. No. 938 amended into “exempt from the payment of ALL FORMS OF taxes” President Marcos must have considered all the NPC statutes from C.A. No. 120 up to P.D. No. 938. One common theme in all these laws is that the NPC must be enable to pay its indebtedness 56 which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved. The tax exemption stood as is — with the express mention of "direct and indirect" tax exemptions. Lawmakers wanted the NPC to be exempt from ALL FORMS of taxes — direct and indirect. Therefore, that NPC had been granted tax exemption privileges for both direct and indirect taxes under P.D. No. 938. The Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold. Because, however, the NPC has been exempted from both direct and indirect taxation, the NPC must be held exempted from absorbing the economic burden of indirect taxation

of P2M+. Income tax due on the return was duly paid w/in the period prescribed by law. 
 CIR then advised Ayala for the assessment of P758k unpaid tax on its accumulated surplus.

HYDRO RESOURCES V. COURT OF TAX APPEALS ET AL. GR 80276; December 21, 1990 Facts: Hydro Resources Contractors Corporation entered into a contract of sale with the National Irrigation Authority (NIA) for the construction of Magat River Multipurpose Project in Isabella in August 1978. The contract provided that Hydro will import parts, construction equipment and tools and taxes and duties to be paid by NIA. Tools and equipment arrived during 1978 and 1979. NIA reneged on the contract. Therefore causing the transfer its sale to Hydro in seperate dates in December 6, 1982 and March 24, 1983. Executive Order 860 took effect during December 21, 1982 provided for 3% ad valorem tax on importations and it specifically provided that it should have no retroactive effect. During the contract of sale execution, Hydro was assessed and paid the said 3% ad valorem tax worth P 281,591 under protest. The Hydro when filing for refund with Customs Commissioner who indorsed the approval of the refund but was denied by the Secretary of Finance and motion was denied by the Court of Tax Appeals. Issue: W/N should the Executive Order 860 should have a retroactive effect. Held: No, The Court of Tax Appeals erred in applying a retroactive effect for the Executive Order therefore should not have been subject to the additional 3% ad valorem tax. In general tax laws are not retroactive in nature. Not only that Executive Order 860 specifically provides that it is not retroactive in nature, but also when the conditional contract of sale was executed, its had a suspensive condition contemplated in the Civil Code (Article 1187) where it returned ownership to the seller Hydro because NIA was not able to comply with its part of the contract, it was deemed executed as if during the constitution of the obligation which was in 1978 and not in 1982. G.R. No. L-29485 November 21, 1980 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF TAX APPEALS, respondents. *Imprescriptibility of Taxes FACTS: Before the Court is petitioner Commissioner of Internal Revenue's motion for reconsideration of the Court's decision of April 8, 1976 wherein the Court affirmed in toto the appealed decision of respondent Court of Tax Appeals: cancelled and declared of no force and effect. This Court's decision under reconsideration held that the assessment made on February 21, 1961 by petitioner against respondent corporation (and received by the latter on March 22, 1961) in the sum of P758,687.04 on its surplus of P2,758,442.37 for its fiscal year ending September 30, 1955 fell under the five-year prescriptive period provided in section 331 of the National Internal Revenue Code and that the assessment had, therefore, been made after the expiration of the said five-year prescriptive period and was of no binding force and effect . Ayala Securities Corp filed its ITR w/ the CIR for the fiscal year w/c ended on Sept 30, 1955. Attached to its ITR was the audited financial statements showing a surplus

Ayala protested ate assessment and sought reconsideration given that the accumulation was 1) for a bona fide business purpose and not to avoid imposition of tax, and 2) assessment was issued beyond 5 yrs. CTA and SC both held that the assessment was made beyond the 5-year period and thus had no binding force and effect. 


ISSUE: Whether or not the assessment was done beyond the prescriptive period 
 HELD: YES. 
 In this case, the applicable provision is NOT Sec 332a but Sec 331. Sec 332 should apply when there is fraud / falsity on the return with intent to evade payment of tax. There is no evidence presented by the CIR in this case as to any fraud/falsity on the return w/ intent to avoid payment. Fraud is a question of fact, circumstances must be proven and alleged. 
 In this case, the assessment issued on Feb 21, 1961, received by Ayala on March 22, 1961, was made BEYOND the 5 year period prescribed under Sec331 (Ayala could file its income tax on or before Jan 1956à thus, assessment must be made NOT later than Jan 1961). Thus, it was no longer binding on Ayala Securities. 
 Villanueva v. City of Iloilo G.R. No. L-26521 December 28, 1968 FACTS: On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing license tax fees as follows: (1) tenement house (casa de vecindad), P25.00 annually; (2) tenement house, partly or wholly engaged in or dedicated to business in the streets of J.M. Basa, Iznart and Aldeguer, P24.00 per apartment; (3) tenement house, partly or wholly engaged in business in any other streets, P12.00 per apartment. The validity and constitutionality of this ordinance were challenged by the spouses Eusebio Villanueva and Remedies Sian Villanueva, owners of four tenement houses containing 34 apartments. On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the passage of Republic Act 2264, otherwise known as the Local Autonomy Act, it had acquired the authority or power to enact an ordinance similar to that previously declared by this Court as ultra vires, thus enacted an “Ordinance Imposing Municipal License Tax on Persons Engaged in the Business of Operating Tenement Houses”. ISSUE: Whether or not the tax imposed by the ordinance falls within any of the exception provided in Section 2 of the Local Autonomy Act, thus imposing a double taxation HELD: No double taxation. The tax imposed was license tax and not real estate tax. It is necessary to determine the true nature of the tax. The appellees strongly maintain that it is a "property tax" or "real estate tax," and not a "tax on persons engaged in any occupation or business or exercising privileges," or a license tax, or a privilege tax, or an excise tax. The tax in question is not a real estate tax. A real estate tax is a direct tax

on the ownership of lands and buildings or other improvements thereon and is payable regardless of whether the property is used or not. The tax is usually single or indivisible, although the land and building or improvements erected thereon are assessed separately, except when the land and building or improvements belong to separate owners. It is a fixed proportion of the assessed value of the property taxed, and requires, therefore, the intervention of assessors. It is collected or payable at appointed times, and it constitutes a superior lien on and is enforceable against the property subject to such taxation, and not by imprisonment of the owner. The tax imposed by the ordinance in question does not possess the aforestated attributes. Clearly, therefore, the tax in question is not a real estate tax. "The spirit, rather than the letter, or an ordinance determines the construction thereof, and the court looks less to its words and more to the context, subject-matter, consequence and effect. Accordingly, what is within the spirit is within the ordinance although it is not within the letter thereof, while that which is in the letter, although not within the spirit, is not within the ordinance." It is within neither the letter nor the spirit of the ordinance that an additional real estate tax is being imposed, otherwise the subject-matter would have been not merely tenement houses. It is plain from the context of the ordinance that the intention is to impose a license tax on the operation of tenement houses, which is a form of business or calling. Thus, there is no double taxation. G.R. No. L-7521 October 18, 1955 VERONICA SANCHEZ, plaintiff-appellant, vs. THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee. FACTS: Appellant Veronica Sanchez is the owner of a two-story, four-door "accessoria" building at 181 Libertad Street, Pasay City, which she constructed in 1947. The building has an assessed value of P21,540 and the land is assessed at P7,980, or a total value of P29,540. While appellant lives in one of the apartments, she is renting the rest to other persons. In 1949, she derived an income therefrom. Appellant also runs a small dry goods store CIR made demand upon appellant for the payment of P163.51 as income tax for the year 1950, and P637 as real estate dealer's tax for the year 1946 to 1950, plus the sum of P50 as compromise. Appellant paid the taxes demanded under protest, and on October 16, 1951 filed action in the CFI of Manila against the CIR for the refund of the taxes paid, claiming that she is not a real estate dealer. The lower Court, after trial, found appellant to be such a dealer, as defined by section 194 (s) of the National Internal Revenue Code, as amended by Republic Act Nos. 42 and 588, and declared the collection of the taxes in question legal and in accordance with said provision. Wherefore, Veronica Sanchez appealed to this Court. Appellant argues that she is already paying real estate taxes on her property, as well as income tax on the income derive therefrom, so that to further subject its rentals to the "real estate dealers' tax" amounts to double taxation. ISSUE: WON there is double taxation. HELD: No. The Court held in the case of People vs. Mendaros, et al., that "it is a well settled rule that license tax may be levied upon a business or occupation although the land or property used there in is subject to property tax", and that "the state may collect an ad valorem tax on property used in a calling, and at the same time impose a license tax on

the pursuit of that calling", the imposition of the latter kind of tax being in no sense a double tax. Appellant constructed her four-door "accesoria" purposely for rent or profit; that she has been continuously leasing the same to third persons since its construction in 1947; that she manages her property herself; and that said leased holding appears to be her main source of livelihood, we conclude that appellant is engaged in the leasing of real estate, and is a real estate dealer as defined by section 194 (s) of the Internal Revenue Code, as amended by Republic Act No. 42. G.R. No. L-4817

May 26, 1954

SILVESTER M. PUNSALAN, ET AL., plaintiffs-appellants, 
 vs.
 THE MUNICIPAL BOARD OF THE CITY OF MANILA, ET AL., defendantsappellants. Topic: Double Taxation Decisions: CFI: Upheld the validity of the provision of law authorizing the enactment of the ordinance but declared the ordinance (no 3398) itself illegal and void on the ground that the penalty there in provided for non-payment of the tax was not legally authorized SC: (1) Affirmed the validity of the law authorizing the enactment of the ordinance and (2) Reversed CFI decision and upheld the validity of Manila ordinance no 3398 Facts: 1. This suit was commenced in the Court of First Instance of Manila by two lawyers, a medical practitioner, a public accountant, a dental surgeon and a pharmacist, purportedly "in their own behalf and in behalf of other professionals practicing in the City of Manila who may desire to join it." Object of the suit is the annulment of Ordinance No. 3398 of the City of Manila together with the provision of the Manila charter authorizing it and the refund of taxes collected under the ordinance but paid under protest (since they claim that they already paid their occupation tax under section 201 of the National Internal Revenue Code) 2. The ordinance in question imposes a municipal occupation tax on persons exercising various professions in the city and penalizes non-payment of the tax "by a fine of not more than two hundred pesos or by imprisonment of not more than six months, or by both such fine and imprisonment in the discretion of the court." Issue: The ordinance and the law authorizing the enactment of the ordinance authorize what amounts to double taxation. Basis of SC Decision: 1. NO double taxation > The argument against double taxation may not be invoked where one tax is imposed by the state and the other is imposed by the, it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same

occupation, calling or activity by both the state and the political subdivisions thereof. THE CITY OF MANILA, LIBERTY M. TOLEDO, in her capacity as THE TREASURER OF MANILA and JOSEPH SANTIAGO, in his capacity as the CHIEF OF THE LICENSE DIVISION OF CITY OF MANILA, petitioners, 
 vs.
 COCA-COLA BOTTLERS PHILIPPINES, INC., Respondent. Topic: Double Taxation Decisions: RTC: Ruled in favor of the respondent declaring that petitioner cannot imposed taxes to the respondent based on Tax Ordinance #7988 as amended by #8011 as being null and void. CTA: Petition denied. Affirmed CTA division decision (it ruled that petition was filed out of time). SC: Petition denied. Affirmed CTA en banc decision (of dismissal) Facts: 3. Prior to 25 February 2000, respondent had been paying the City of Manila local business tax only under Section 14 of Tax Ordinance No. 7794, being expressly exempted from the business tax under Section 21 of the same tax ordinance. 4. Petitioner City of Manila subsequently approved on 25 February 2000, Tax Ordinance No. 7988, amending certain sections of Tax Ordinance No. 7794, particularly: (1) Section 14, by increasing the tax rates applicable to certain establishments operating within the territorial jurisdiction of the City of Manila; and (2) Section 21, by deleting the proviso found therein, which stated "that all registered businesses in the City of Manila that are already paying the aforementioned tax shall be exempted from payment thereof.” (this phrase of the ordinance exempts respondent in paying the tax under Sec 21 of ordinance # 7794) Petitioner City of Manila approved only after a year, on 22 February 2001, another tax ordinance, Tax Ordinance No. 8011, amending (certain provisions) Tax Ordinance No. 7988 5. In a separate case (Coca Cola vs City of Manila), Tax Ordinances #’s 7988 and 8011 were declared null and void by the SC. However, before it’s declaration of null and void, petitioner assessed the respondent tax deficiency (based on the ordinances) amounting to PhP 18MM which the respondent filed a protest with the City Treasurer (Toledo) of Manila. Consequently respondent filed an action with the RTC for the cancellation of the assessment. 6. Petitioner filed a Motion for Extension of Time to File Petition for Review with the CTA division but was declared out of time (May 24, 2007 CTA division already rendered a decision despite on May 18, the petitioner filed another extension – 10 days ending May 30 in order to file its petition for review on the RTC decision).

Issue: WHETHER OR NOT THE ENFORCEMENT OF [SECTION] 21 OF THE [TAX ORDINANCE NO. 7794, AS AMENDED] CONSTITUTES DOUBLE TAXATION Basis of SC Decision: 2. YES there is double taxation > SC ruled that if the respondent is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose – to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority – petitioner City of Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business. Note: 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 the taxes must be of the same kind or character COMMISSIONER OF INTERNAL REVENUE, petitioner, 
 vs.
 S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents. Topic: Methods of avoiding occurrence Double Taxation – Tax Treaty Decisions: CTA: Ruled in favor of the respondent ordering BIR to issue a tax credit representing overpaid withholding tax on royalty. CA: Appeal denied. Affirmed CTA decision. SC: Petition granted. CA decision is reverse and set aside. Facts: 7. [Respondent], a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A 8. For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00

9. On Oct 1996, respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, "the antecedent facts attending [respondent's] case fall squarely within the same circumstances under which said MacGeorge and Gillete rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. They claimed that the royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the Court of Appeals], par. 12). Respondent's claim for there fund of P963,266.00. Issue: THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RPUS TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY – as a relief in avoiding double taxation between states Basis of SC Decision: 3. The CA erred in ruling that the clause “most favored nation” tax rate of 10% as stated in the RP-West Germany Tax Treaty in relation to the RPUS Tax Treaty is applicable as a relief from double taxation > Relevant provisions of the two Treaties: a. Article 13 (2) (b) (iii) of the RP-US Tax Treaty > iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. b. Article 12 (2) (b) of the RP-Germany Tax Treaty > b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, or from the use of or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience i. Further under Article 24 of the RP-Germany Tax Treaty > Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a credit against German income and corporation tax payable in respect of the following items of income arising in the Republic of the Philippines, the tax paid under the laws of the Philippines in accordance with this Agreement ii. Simply means is that > The rate of 10% is imposed if credit against the German income and corporation tax on said royalty is allowed in favor of the German resident. That means the rate of 10% is granted to the German taxpayer if

he is similarly granted a credit against the income and corporation tax of West Germany 4. The SC ruled that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances Note: The SC provided methods taken by states to eliminate Double Taxation: 5. First, it sets out the respective rights to tax of the state (either only one States impose tax to the taxpayer or both States can impose tax but limited only for the State of source) of source or situs and of the state of residence with regard to certain classes of income or capital 6. 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 > Relief namely: a. Exemption method b. Credit method DEUTSCHE BANK AG MANILA BRANCH vs. CIR
 FACTS: Petitioner withheld and remitted to respondent on 21 October 2003 the amount of PHP 67,688,553.51, which represented the 15%branch profit remittance tax (BPRT) on its regular banking unit (RBU) net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years. Believing that it made an overpayment of the BPRT, petitioner filed an administrative claim for refund or issuance of its tax credit certificate in the total amount of PHP 22,562,851.17. Petitioner also requested from the International Tax Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax rate of 10% under the RPGermany Tax Treaty. Due to the alleged inaction of BIR on the claim, petitioner filed a Petition for Review before the CTA. Petitioner: argues that, considering that it has met all the conditions under Article 10 of the RP-Germany Tax Treaty the CTA erred in denying its claim solely on the basis of RMO Respondent: counters that the requirement of prior application under RMO No. 1-2000 is mandatory. Courts cannot ignore administrative issuances which partakes the nature of a statute and have in their favor a presumption of legality. CTA 2nd division: claim of petitioner for a refund was denied on the ground that the application for a tax treaty relief was not filed with ITAD prior to the payment by the

former of its BPRT and actual remittance of its branch profits to DB Germany, or prior to its availment of the preferential rate of 10%under the RP-Germany Tax Treaty provision. Before the benefits of the tax treaty may be extended to a foreign corporation wishing to avail itself thereof, the latter should first invoke the provisions of the tax treaty and prove that they indeed apply to the corporation. CTA en banc: affirmed.

ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations.

ISSUE: Whether the failure to strictly comply with RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty.

The respondents are husband and wife, both American citizens residing in the Philippines, and have derived all their income from Philippine sources for the taxable years in question.

HELD: PETITION IS MERITORIOUS. A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to ensure the fulfillment of the obligations undertaken.” The time-honored international principle of demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by them in good faith. More importantly, treaties have the force and effect of law in this jurisdiction. Tax treaties are entered into “to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions.” CIR v. S.C. Johnson and Son, Inc.: tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the 19 protection against double taxation is crucial in creating such a climate.‰ Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical double taxation, which is why they are also known as double tax treaty or double tax agreements. Thus, laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements. More so, when the RP-Germany Tax Treaty does not provide for any pre-requisite for the availment of the benefits under said agreement. Application for tax treaty relief merely confirms entitlement to the relief. The period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. CTA’s outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to

CIR vs. Lednicky (1964) FACTS: 3 cases for refund were consolidated subjects of this case.

They filed their income tax returns, and amended them due to refund claims. They claimed deductions due to the income tax they paid to the US government. The tax court ruled in the respondents’ favor in the 3 cases. ISSUE: WON a citizen of the US residing in the Philippines, who derives income wholly from sources within the Philippines, may deduct from his gross income the income taxes he has paid to the US government for the taxable year. HELD: An alien resident who derives income wholly from sources within the Philippines may not deduct from gross income the income taxes he paid to his home country for the taxable year. The right to deduct foreign income taxes paid given only where alternative right to tax credit exists. Section 30 of the NIRC, Gross Income “Par. C (3): Credits against tax per taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this shall be credited with: Paragraph (B), Alien resident of the Philippines; and, Paragraph C (4), Limitation on credit.” To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latter the power to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident. Everytime the rate of taxation imposed upon an alien resident is increased by his own government, his deduction from Philippine taxes would correspondingly increase, and the proceeds for the Philippines diminished, thereby subordinating our own taxes to those levied by a foreign government. Such a result is incompatible with the status of the Philippines as an independent and sovereign state. Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity. In the present case, while the taxpayers would have to pay two taxes on the same income, the Philippine government only receives the proceeds of one tax. As between the Philippines, where the income was earned and where the taxpayer is domiciled, and the United States, where that income was not earned and where the taxpayer did not reside, it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines. Any relief from the alleged double taxation should come from the United States, and not from the Philippines, since the former's right to burden the taxpayer is solely predicated on his citizenship, without contributing to the production of the wealth that is being taxed.