Tax 1 Primer .pdf

CHAPTER 1: TAXATION IN GENERAL TAXES: enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty, for the support of the government and for all public needs. TO TAX: to impose a financial charge or other levy upon a tax payer by a state or the functional equivalent of a state. Amount of tax collected by the taxing authority from the public is always greater than the amount to be expended for public purpose. COMPLIANCE COST: resulting difference; which includes labor cost and other expenses incurred in complying with tax laws and rules. HYPOTHECATION: levy of a tax for a specified end (e.g. imposing a tax on vehicles to be used on road construction rehabilitation and maintenance)

TAXATION DEFINED Governments perspective Power by which the sovereign, through its lawmaking body, raises revenue to defray the necessary expenses of the government. A way of apportioning the costs of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens.

Taxpayer’s perspective Compulsory transfer of money (or goods) from private individuals, institutions or groups to the government. It may be levied upon wealth or income, or in the form of a surcharge on prices.

Economist’s perspective Non-penal, yet compulsory transfer of resources from the private to the public sector levied on a basis of predetermined criteria and without reference to specific benefit received.

Destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.

Some Taxation related terms Tax base Assessment or determination of tax liability is based or the wealth within a jurisdiction that is liable to taxation.

Tax rate Describes burden ration, usually expressed as a percentage, at which a person, property, privileges or occupation is taxed.

Ex. Taxable income is the tax base for income tax and assessed value is the tax base for property taxes.

Important distinction when considering tax rates is to distinguish between marginal rate and effective average rate. Marginal tax rate Average rate Percent levied on Rate a taxpayer would each additional peso be taxed at, if taxing of taxable income. was done at a constant rate, instead Marginal tax rate of progressively. rises as income increases.

Impact of tax Person from whom government collects money in first instance. Refers to liability for the tax.

Incidence of tax Person who finally bears the burden of a tax.

Ex. Amount of sales tax paid may be shifted or passed on by the seller to the buyer. What is transferred is not the liability for the tax, but the tax burden. A seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for the payment, ultimately bears the burden of the tax. Tax base erosion When traditional taxable components of the tax based are no longer representative of the economy at large, this results to demographic changes, relative changes in production, stagnation or inflationary effects. May also result from use of aggressive tax strategies by taxpayers (eg. Less than appropriate income is shown and more than deduction is claimed).

Tax pyramiding When sales taxes are applied to both inputs and outputs, thus shifting the tax burden to the ultimate consumer. In this situation, some or all stages of production are taxed, with the accumulation borne by the consumer at the point of sale. Ex. When a product is taxed at the pre-retail stage and thus, tax is imposed on successive pairs of buyers and sellers rather than only at the final sale of the product to the ultimate consumer. Violates the uniformity and neutrality principles of taxation.

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Neutral tax Tax that does not cause individuals or firms to shift their economic choices, such as to choose among different goods, inputs, locations etc. Tax structure that does not change the incentives in the market. Ex. Poll tax (e.g. Community Tax Certificate).

Statutory taxpayer Person on whom the tax is imposed by law and who paid the same even if he shifts the burden to another.

Extraterritorial taxation Tax is imposed on property/subject outside the State.

Tax exporting Shifting of a tax burden to nonresidents of a given jurisdiction. Exporting can be achieved indirectly by taxing imports or through intergovernmental transfer mechanisms.

RELEVANT THEORIES/BASES OF TAXATION (NL-BS-NS) 1. Necessity theory and lifeblood doctrine: the existence of the government is a necessity. It has the right to compel all citizens and property within its limits to pay taxes. Taxes constitute the lifeblood of the nation and are greatly needed to support the government and its widely expanding services to the people. a. b.

e.

Primary purpose for legislature in adopting measures is to generate funds for the State to finance the needs of citizenry and to advance common weal. 1 f. Granting exemptions are construed as strictissimi juris against the taxpayer and liberally in favor of taxing authority. GR: Taxation EXCEPTION: exemption from tax EXCEPTION TO EXCEPTION: if grantee is a political subdivision or instrumentality, rigid rule of construction does not apply because practical effect of exemption is to reduce the amount of money that has to be handled by the government in the course of its operation.

Revenue Neutral Taxing procedure that allows the government to still receive the same amount of money despite changes in tax laws. Government may lower taxes for one group and raise for another. This allows revenue to remain unchanged.

Should be collected without unnecessary hindrance. Claims for refund or tax credit should be exercised within the time fixed by law because the functions of an administrative body enforced to collect taxes should not be unduly delayed or hampered by incidental matters. c. Fraudulent means employed to evade payment of taxes should be stopped at the earliest stage. d. Neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm in the same manner as private persons may be made to suffer individually on account of his own negligence. PRESUMPTION: Private persons take good care of their personal affairs. EXCEPTION: government officials with respect to matters of public concern; exception to the principle of estoppel.

2.

Benefits-protection theory/theory of reciprocity/symbiotic relationship—citizen pays from his property the portion demanded in order that he may be secured in the enjoyment of the benefits of organized society. A person cannot object to or resist the payment of taxes solely because no personal benefit to him can be pointed out arising from the tax.

Despite natural reluctance to surrender part of one’s income to taxing authorities, every person who is able must contribute his share in the burden of running the government. Government is expected to respond in the form of tangible and intangible benefits.  BPI-FSB vs. CA HELD: If State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments. When it is undisputed that a taxpayer is entitled to a refund, the State should not invoke technicalities to keep money not belonging to it. No one, not even the State, should enrich oneself at the expense of another”. It is a requirement that it be exercised in accordance of the prescribed procedure. If not, the taxpayer has a right to complain.

3.

Taxation as government violation of the non-aggression principle and the social contract theory.

Government violation of non-aggression principle—taxation wrongfully presumes that government has a higher claim on property than the owner. Taxation is theft and tax resistance is therefore legitimate. 1

The most strict right or law.

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Social contract theory—in an organized society, members agree to define and limit the rights and duties of each. Principal attribute of sovereignty is the exercise of taxing power which derives its source from the existence of the state whose social contract with its citizens obliges it to promote public interest and common good.

Purposes and effect of taxation(Six [6] Rs) 1. Raise revenues. 2. Regulatory purpose. 3. Redistribution of wealth/reduction of social inequality. 4. Repricing. 5. Resuscitate economy. 6. Representation. RAISE REVENUES—Primary purpose is REVENUE: to generate funds or property for the State to finance the needs of the citizens and to advance the common weal. Taxation is no longer a measure merely to raise revenue; taxes may be levied with a regulatory purpose as an exercise of police power of the State.

REGULATORY PURPOSE— police power may sometimes use the taxing power as an implement for the attainment of a legitimate police objective.  Powell vs. Pennsylvania HELD: If massage parlors are found to be mere fronts for prostitution, they may be subjected to such onerous taxes as to practically force them to stop operating.  PAL vs. Edu HELD: Law requiring owners of vehicles to pay for their registration is to raise funds for construction and maintenance of highways. Fees may be regarded as taxes even though they also sere as an instrument of regulation. If the purpose is revenue, or if revenue is one of the real and substantial purposes, exaction is called a TAX. SUMPTUARY PURPOSE OF TAXATION: non-revenue or regulatory purpose of taxation. REDISTRIBUTION OF WEALTH/REDUCITON OF SOCIAL INEQUALITY—there is an effort to apportion the costs of government among the people which in a way thwarts the undue concentration of wealth in the hands of a few individuals. PROGESSIVITY: those who are able to pay more should shoulder the bigger portion of tax burden. Taxation is now being used as an implement for exercise of the power of eminent domain.

Full reimbursement (peso for peso basis) is not necessary when the State uses taxation as an implement of eminent domain. Ex. Tax deduction does not offer full reimbursement of the senior citizen discount because it only shaves money off the taxable income resulting to a partial recovery unlike a tax credit which reduces the tax to be paid by the amount of discount. As such, it does not meet the definition of just compensation. However, amendment to the law granting senior citizen discount providing for tax deduction instead credit is not unconstitutional since the State can impose upon private establishments the burden of partly subsidizing a government program. REPRICING— taxes may be levied to address externalities. EXTERNALITIES: cost or benefit that is not transmitted through prices and is incurred by a party who was not involved as either a buyer or seller of the goods or services causing the cost or benefit. External cost Negative externality/cost of an externality

External benefit Positive/benefit of an externality

Ex: Imposition of Pigovian Tax PIGOVIAN TAX: tax levied on a market activity to correct the market outcome, if there are negative externalities associated with market activity. If there are negative externalities, social cost is not covered by the private cost of the activity which may lead to over-consumption of the product. To correct this, Pigouvian tax may be imposed (effective means to reduce incidence of bad behavior is to tax it). If there are positive externalities (public benefits from a market activity), those who receive the benefit do not pay for it and the market may under-supply the product. To correct this, Pigouvian subsidy may be given. Illustration: A tax may be imposed on cigarettes—vs. negative externality of second-hand smoke. Pollution tax—factories emitting smoke. Taxes may be used to modify consumption or employment by making some classes of transaction attractive or to protect local industries or consumers. Ex: Levying of special duties on importation 1. Dumping duty; 2. Countervailing duty; 3. Marking duty; and 4. Discriminatory or retaliatory duty.

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RESUSCITATE ECONOMY— tax may be imposed as a first aid measure to resuscitate an economy in distress. Ex: PD 1956: AD VALOREM TAX on manufactured oils and other fuel oils—for the purpose of minimizing frequent price changes by exchange rate adjustments and/or increase in world market prices of crude oil and imported petroleum products. Tax exemptions may be granted to entice investments. Reduced tax collection redounds by enticing more business investments and employment opportunities. FISCAL POLICY: taxes used to influence macroeconomic performance.

REPRESENTATION—“no taxation without representation”; no taxes should be imposed on the people but with their consent, personally or by representatives. CONSTI: all bills for raising revenue shall originate in House of Representative on theory that they are more sensitive to local needs and problems. Characteristics and requisites of taxes Characteristics 1. An enforced contribution. 2. Exacted pursuant to legislative authority. 3. Contribution being in form of money. 4. Imposed, levied and collected for the purpose of raising revenue. 5. To be used for public or governmental purposes. 6. Levied by authority which has jurisdiction over the person, property, transaction, rights and privileges. Requisites (JAPUN) 1. Person or property taxed should be within jurisdiction of taxing authority. 2. Assessment and collection of certain kinds of taxes guarantee against injustice to individuals, especially by providing notice and opportunity for hearing. 3. For public purpose. 4. Rule of taxation shall be uniform and equitable. 5. Tax must not impinge on the inherent and constitutional limitation on power of taxation. An enforced contribution—does not depend on the will or acquiescence of the taxpayer. Exacted pursuant to legislative authority—GR: power is exercised only by the legislative department except in case of valid delegations of power or when there is constitutional grant.

Contribution in the form of money—there is no law prohibiting payment in some other form of property. However, State could determine in what manner taxes should be discharged. 1. Notes of legal tender do not apply to involuntary contributions exacted by a State buy only to debts (obligations for payment of money founded on contracts, whether express or implied). 2. Statute requiring payment to be collected in gold and silver coins was sustained on 2 grounds: a. Right of each state to collect its taxes in such material as it might deem expedient. Mode in which it should be exercised, were all equally within the discretion of its legislature, except as restrained by its own constitution; and b. Legal tender act had no reference to taxes imposed by State authority, but only to debts arising out of simple contracts or contracts of specialty, which include judgments or recognizances. Imposed, levied and collected for purpose of raising revenue—taxes may have regulatory or economic purpose other than to generate funds. To be used for public or governmental purpose—it cannot be used for private purposes. Levied by authority which has jurisdiction over the person, property, transaction, rights and privileges—jurisdictional limitation has 2 questions: 1. Is there a sufficient relationship between the State exercising tax power and the object of the exercise of that power? 2. Is the degree of contact sufficient to justify the state’s imposition of a particular obligation? Nature of taxing power 1. It is inherent and legislative. Inherent GR: power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of this legislature which imposes the tax on the constituency who are to pay it. Rule of taxation shall be uniform and equitable and Congress shall evolve a

Legislative Legislature lies the discretion to determine the nature, object, extent, coverage and situs of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose. Scopes of legislative power: 1. Purposes provided they are lawful and public 2. Person, property, privileges or

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progressive system of taxation. The following are manifestation of this inherent nature 1. It can be imposed even in the absence of a constitutional grant 2. Injunction is not generally available to enjoin collection of taxes 3. Taxes cannot be set-off or compensated 4. It is an unlimited or plenary power 5. It is inherent in the power to tax that State be free to select the subjects of taxation Taxing power of LGUs is not inherent because they are not sovereign units. LGU is merely an agency of the State for carrying out the objects of the government. Thus, constitutional or legislative grant is necessary before it can exercise taxing power. 2. 3. 4. 5. 6. 7.

3. 4. 5.

6. 7.

occupation to be taxed Amount or rate Kind of tax Apportionment of tax (whether tax shall be of general application or limited to a particular locality, partly general and partly local) Situs Mode or method of collection

Power to tax is primarily vested in Congress; however it may be exercised by local legislative bodies pursuant to direct authority conferred by SEC 5, ART 10 CONSTI. TAX FARMING: principle of assigning the responsibility for tax revenue collecting to private citizens or grounds was once used by other countries.

Power is not granted in the Constitution. It is not a contract between the State and its citizens. It is not political in nature. Taxes are personal. It is unlimited in range. It is imprescriptible.

Power is not granted in the Constitution—it merely constitutes limitations upon a power which would be impractical without it SEC 28(3), ART 6 CONSTI. Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, nonprofit cemeteries and all lands, buildings and improvements, actually, directly and exclusively used for religion, charitable or educational purposes shall be exempt from taxation. It is not a contract between the State and its citizens—it operates in invitum, which means that it is in no way depend on the will or contractual assent, expressed or implied, of the person taxed.

Taxes are obligations arising from law and not from contracts because of lack of consent or choice. It is not political in nature— Co Kim Chan vs. Valdes Tan Keh HELD: Internal revenue laws were continued in force during the period of enemy occupation and in effect were 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 occupied territory and not of the occupying enemy. Tax are personal—liability cannot be shifted. Rights are transmissible but obligations are not. Thus, heirs cannot be held liable beyond what they inherited for delinquent taxes of a decedent. Corporation’s tax delinquency cannot be enforced against its stockholders or related entities. A corporation is vested by law with a separate and distinct personality. However, stockholders may be held liable for the unpaid taxes of a dissolved corporation if it appears that corporate assets have been passed into their hands. Same is true if stockholders have unpaid subscriptions pursuant of the trust fund doctrine. In case of indirect taxes, shifting of the burden to tax from the seller to the buyer is not incompatible with the principle that taxes are personal liabilities. When seller passes on the tax to his buyer, he is only shifting the tax burden, but not the liability, to the buyer as part of the cost of the goods sold or services rendered. It is unlimited in range—it is not subject to any restrictions except in the discretion of the authority which exercises it. Security against its abuse is to be founded only in the responsibility of the legislature which imposes the tax on the constituency who pay it. McCulloch vs. Maryland HELD: Power to tax involves the power to destroy.  Panhandle vs. Mississippi HELD: Debunked the ruling in McCullock vs. Maryland where it is held that "power to tax is not the power to destroy while this court sits”. The power to tax may include the power to destroy if it is used as an implement of the police power in discouraging and in effect ultimately prohibiting certain things or enterprises inimical to public welfare. But where the power to tax is used solely for the purpose of raising revenues, modern view is that it cannot be allowed to confiscate or destroy. It is imprescriptible—without exception, taxes being the lifeblood of the government. However, statutes may provide for prescriptive periods for the collection of particular kinds

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of taxes when government has not by express statutory provision, provided a limitation upon its right to assess unpaid taxes, such right is imprescriptible. HELD: The government is not bound by any statute of limitations, unless Congress has clearly manifested its intention that it should be so bound. Aspects of taxation 1. Aspects (LAP) 2 a. Levy 3 b. Assessment and Collection 4 c. Payment and/or exercise of remedies 2.

Grant of exemption is an exercise of power of taxation—power to tax includes power to exempt

Sound Tax System (ECCEPSD) 1. Canons of taxation. a. Equity. b. Certainty. c. Convenience. d. Economy. e. Productivity. f. Elasticity. g. Simplicity. h. Diversity. Equity—every person should pay to the government depending upon his ability to pay. Certainty—must not be arbitrary; taxpayer should know in advance how much tax he has to pay, at what time and in what form. Convenience—mode and timing must be convenient to tax payers. Economy—cost of tax collection should be lower than amount of tax collected. Productivity—tax when levied should produce sufficient revenue to the government.

Elasticity—tax system should be fairly elastic so that if at any time the government is in need of more funds, it should increase its financial resources without incurring any additional cost of collection. Simplicity—tax system should be fairly simple, plain, and intelligible to the taxpayer. Diversity—system should include a large number of taxes which are economical; government should collect revenue by levying direct and indirect taxes. 2.

Basic principles of Sound Tax System(FAT). a. Fiscal adequacy. b. Administrative feasibility. c. Theoretical justice.

Fiscal adequacy—sources of revenues must be adequate to meet government expenditures and their variations; violation of this principle will make the law unsound but still valid and not unconstitutional. Administrative feasibility--- taxes should be capable of being effectively enforced; tax policy that costs government and taxpayers more to collect that taxes generated is inherently flawed. Violation of this principle will make the law unsound but still valid and not unconstitutional. Theoretical justice—taxed must be based on the taxpayer’s ability to pay and proportional to the relative value of the property; it must be uniform and equitable and that State must evolve a progressive system of taxation. It is progressive when its rate goes up depending on the resources of peron affected. Violation of this principle will make the law unsound, invalid and unconstitutional. Taxes are not subject to compensation—Taxes cannot be offset from government obligations or liabilities due to the taxpayer 1. Taxes cannot be subject of compensation because government and taxpayer are not mutual creditors and debtors of each other. A claim for taxes is not a debt, demand, contract or judgment that is allowed to be set-off. 2. Tax and debt Tax Due to government in its sovereign capacity

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Determination of persons, property or exercises to be taxed, amount to be raised, rate to be imposed and the manner of implementation; this is exercised by the Legislature. 3 Manner of enforcing the obligation of taxes already levied upon the taxpayer; act of administration and implementation by Executive Department. 4 Compliance and/or resistance by the taxpayer; through Executive or Legislature (through suffrage or initiative/referendum) and ultimately through Judiciary.

Imposts levied by the Government for its support or some special purpose, which the government has recognized.

Debt Due to the government in its corporate capacity Sum of money due upon contract, express or implied or one which is evidenced by judgment

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However, tax in a broad sense may be a debt, so that interest on estate and inheritance may be deducted as interest on indebtedness: a. Tax and debt Tax Debt Does not proceed from contract Generally the result of the contract Obligations created by law and Obligation created by a contract governed by special laws and falsification and non-payment of such taxes impose criminal liabilities May be off-set May arise out of acts of private May not be off-set individuals Can only be imposed by public authority Can be assigned May be paid in money, property or Cannot be assigned service Generally payable in money Draw interest if stipulated or there Do not draw interest unless is default delinquent b.

ART 1200. When all requisites mentioned in ART 1279 are present, compensation takes effect by operation of law and extinguished both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. Compensation may be applied if these circumstances are present: 1. Both the claim of the Government for inheritance tax and claim for estate for services rendered have already become due, demandable and fully liquidated. 2. An amount for the claim of the estate had already been appropriated by the Government by virtue of law.  CIR vs. Esso Standard 6

HELD: On the ground of solution indebiti , SC allowed compensation. Obligation to return money mistakenly paid arises from the moment that payment is made, and not from the time the payee admits the obligation to reimburse. Since the money belonging to ESSO was already in the hands of the government, although the latter ha no right whatever to the amount and indeed was bound to return it, it was neither legally nor logically possible for ESSO to be considered a debtor of the Government; and whatever other obligation ESSO might subsequently incur in favor of the Government should have to be reduced in that sum, in respect of which no interest could be charged.

Rule on non-imprisonment for non-payment of debts is not applicable. Except for community taxes/poll taxes (cedula), fraudulent non-payment of other taxes (like real estate) would be subject to imprisonment. Falsification of community tax is subject to criminal liability.

c.

There can be no off-setting; collection of tax cannot avail the results of a lawsuit against the government.

d.

Compensation had been the practice in the past can set no valid precedent. Such practice has no legal basis.

EXCEPTION:  Domingo vs. Garlitos HELD: SC allowed legal compensation of tax and debt when the claim of the estate against the Government has been recognized and amount has already been appropriate for the purpose of a corresponding law. Both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation takes place by operation of law and both debts are extinguished to the concurrent amount, this:

 Republic vs. Ericta and Sampaguita Pictures HELD: SC upheld the dismissal of complaint to pay the amount for alleged unpaid taxes and counter claim representing the face value of negotiable certificates of indebtedness.

DOCTRINE OF EQUITABLE RECOUPMENT: grants a right to a creditor to recover debt; debt diminishes to the extent s/he holds the debtor’s property in violation of the debtor’s legal rights. It is the legal principle that a creditor loses right to recover a debt if the creditor 5

ART 1279. In order that compensation may be proper, it is necessary: 1. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; 2. That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; 3. That the two debts be due; 4. That they be liquidated and demandable; 5. That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. 6 Payment to one of what is not due to him.

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illegally possess some of the debtor’s property. ( Doctrine does not apply in the Philippines.) Applied in taxation— 1. It allows a taxpayer to set off previously overpaid taxes due, even though the taxpayer is time-bared from claiming refund on previous taxes. It applies only if the Statute of Limitation has created an inequitable result. It is a defensive remedy against mitigation of damages. 2.

3.

engaging in a certain business or profession is not poll tax.

It is applicable in cases to a taxpayer who erroneously paid a tax and is later properly assessed a tax arising from the same taxable event. It allows the taxpayer to offset the tax properly assessed by the tax erroneously paid, even if the Statute of Limitations would otherwise prevent the taxpayer from recovering the earlier overpayment through a claim for refund. It can occur only when the untimely refund claim to be set off against the timely assessment occurs within the same transaction or tax year. Doctrine can only be used as a defense to an assessment made during the same transaction or tax period.

amount owned by him during the way. It is assessed at stated period determined in advance, collected at appointed times, enforced by sale of property and by imprisonment of person assessed. It is a tax in rem and judgments in proceedings is one in rem.

2.

Purpose

General, fiscal or revenue Designed to raise revenue for the general or ordinary purposes.

Classification of taxes 1. Subject matter Personal, capitation or poll Taxes of a fixed amount upon all persons or upon all persons of a certain class, resident within a specified territory, without regard to their property or occupations in which they may be engaged.

Property

Excise or privilege

Taxes assessed on all property or on all property of a certain class located within a certain territory on a specified date in proportion to its value, or in accordance with some other reasonable method of apportionment. Obligation to pay is absolute and involuntary.

Charge imposed upon performance of an act, enjoyment of a privilege or engaging in an occupation.

Taxes of a specified amount upon each person performing a certain act or

It is measured by amount of property owned by the taxpayer on a given day, and not on the total

However, these do not pertain to performance of an activity, at least not to extent of equating excise with business.taxes.

Customs duties Charged upon commodities being imported or exported.

Special or regulatory Achieve social or economic goals irrespective of whether revenue is actually raised or not. Special tax is imposed for special public purpose. Money raised shall be spent only for such purpose and if such purpose has been fulfilled, remaining amount shall be placed in general funds of the government to be spent for any general purpose.

3.

Who bears the burden

Direct Imposed and absorbed by same person. Personal tax Those of a fixed amount upon all persons of a certain class within jurisdiction of the taxing power without regard to the amount of their

Direct tax Both the incidence of or liability for the payment of tax as well as impact or burden of tax falls on same person and cannot be shifted.

Indirect Tax paid by a person other than one whom it is imposed. Taxes wherein liability for payment of tax falls on one person to another. Illustration 1. VAT is payable by any person, in the course of trade and business. It is applied to each stage of production. Burden of paying the amount may be shifted on to the

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property. Ex. Franchise tax: a percentage tax imposed on franchise holders is a direct liability of the franchise grantee. Those that are exacted from the very person ho, it is intended or desired, should pay them; they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in. Ex. Income tax—taxes an individual’s ability to pay based on his income or net wealth.

2.

3.

buyer, transferee or lessee of goods, properties or services. Contractor’s tax—payable by contractor but it is the owner of the building that shoulders the burden. Excise tax—liability for payment may fall from a person other than the one who actually bears the burden.

Those that are demanded, from or are paid by, one person in the expectation and intention that he can shift the burden to someone else.

Ex. VAT—substantial portion of consumer expenditures.

value of the subject being taxed.

5.

National Imposed by Congress

6.

Rate or graduation

Proportional Fixed rate regardless of tax base.

Progressive or graduated Tax rate and tax base are directly proportional.

Regressive Tax rate and tax base are inversely proportional.

Implies that tax rate progresses as affluence (income) increases.

Implies that tax rate regresses as affluence increases. PROGRESSIVE TAXES: tax imposed whereby the rate or amount of tax increases. REGRESSIVE TAXES: tax rate decreases as the amount of income increases. PROPORTIONATE TAXES: based on a fixed portion of the

Local/municipal imposed by local legislative bodies

Scope

General Imposed throughout the state or civil division for raising revenue for general purposes on the ground of general public interests.

7. 4.

Taxing authority

Specific Levied for a special purpose for the benefit of a part of a body politic resting upon the supposition that a portion of the public is specially benefited in the increase of the value of property.

Basis of amount

Specific Fixed amount by head or number or by some standard of weight or measurement. Specific Imposes a specific sum by the head or number or by some standard of weight or measurement and which requires no assessment beyond a listing and classification of the subject to be taxed.

8.

Excise Privilege tax laid upon the manufacture, sale or consumption of commodities within the country .

Ad valorem (value) Fixed proportion of value of property with respect to which taxes are assessed and require the intervention of assessors or appraisers to estimate the value of such property.

Others

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Consumption Imposed on consumable commodities and services.

Sumptuary Government levy on goods considered socially undesirable, most commonly alcohol and tobacco.

Most are flat rate taxes. Sales, excise and VAT are different forms.

Flat Charged no matter how much value. It does not change.

limitations oppressive.

SALES TAX: indirect consumption tax applied at the retail level. These are calculated by multiplying the retain price of a good or service by the tax rate. Other source of revenue/funds and impositions 1. License fees: paid for the right granted by some competent authority to do an act which, without such authority, would be illegal. It implies an imposition on the right to use or dispose of a property, purpose a business, occupation or calling or exercise a privilege. a. SEC 147, LGC: municipalities may impose and collect such reasonable fees on business and occupation, and (except professional tax) on practice of any profession or calling commensurate with cost of regulation, inspection and licensing before any person may engage in such business or occupation. b. Amount of fee is considered in determining whether for revenue or as regulation. Exemption from tax does not carry exemption from license fee. However, if license fee is substantially more than cost of regulation, it may be considered as tax and therefore covered by exemption. Authority to exact fee does not carry power to collect tax. Tax Emerges from power of taxation of State.

License fee Emerges from police power of State.

PURPOSE: generate revenue; regulation is incidental. It is not tax even if revenue is incidentally generated.

PURPOSE: regulatory to promote public welfare.

Amount

is

not

subject

to

Amount limited to regulation—cost of permit (issuance of license and

2.

provided

not

regulation) and supervision (surveillance). EXCEPTION: when imposed to nonuseful occupations.

Normally paid when business on operation. Tax cannot be bargained away except for lawful consideration.

Before commencement of business. May be bargained away with or without consideration.

Non-payment does not make business illegal. However, it may be ground for criminal prosecution, distraint and levy of properties.

Non-payment of license fee makes business illegal.

Special assessment—exaction on property levied in accordance with benefits conferred upon that property.

Taxes Levied on land, persons, property, income, business etc.

Special assessments Levied on land. Not and cannot be made a personal liability.

Personal liability of taxpayer. Based solely on benefits derived. Based on necessity and partially on benefits derived.

Of special application only as to particular time and place.

Of general application. Ordinary tax Provide the government with revenues needed for the financing of state affairs.

Refusal of citizen to pay may not be sanctioned because it would government functions.

Special assessment Finance the improvement of particular properties, with benefits of the improvement accruing or inuring to the owners who pay the assessment. Refusal to pay may hold sanctions.

3.

Fines—paid in case of violation of law.

4.

Penalty—punitive sanction for compelling timely action.

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Tax Enforced proportional contributes persons and property.

from

Imposed to raise revenue. Only government may impose.

Penalty Punishment for violation of law or acts deemed injurious. Thus, violation of tax may give rise to imposition of penalty. Imposed to regulate and rectify a conduct.

Taxation distinguished from police power and eminent domain 1. Distinctions Taxation For revenue.

Police power For promotion of general welfare.

Amount has no limit so long as it is not confiscatory.

Government and individuals may impose. General benefit to all inhabitants (e.g. protection).

5.

Toll—payment or fee exacted by the authorities for some right or privilege (e.g. passage along a road or over a bridge).

Taxes Demand of sovereignty for purpose of raising public revenue.

Toll Compensation for the use by one of another’s property.

Amount is determined by State.

Amount based on cost of property or of improvement being used.

Imposed by State.

May be imposed by either government or a private individual or entity.

No special or direct benefit is received by the taxpayer, merely general benefit of protection except in special instances.

Tariff/customs duty—impost upon goods transported from one political jurisdiction to another.

7.

Subsidy—grant of money in aid of a private enterprise deemed to promote the public welfare.

8.

Compromise penalty—amount imposed in case of a compromise involving violations of tax laws.

9.

Revenue—money which comes to a person or entity from an source or sources which includes money which comes to a government from taxes.

Intangible altruistic feeling of having done something good.

Amount depends on the value of property needed. There is just compensation.

Direct benefit results in the form of just compensation to the property owner.

Healthy economic standard of society is attained. Contracts may be impaired.

Contracts may not impaired unless taxpayers gave consideration or in case government franchise.

be the no of a

Money is taken. 6.

Should only cover the cost of regulation (e.g. issuance of license or surveillance).

Eminent domain For public purpose.

Interferes only with property rights although violation of tax laws may result to imprisonment.

Contracts may be impaired. Property other than money and choses in action. Any property, including money, which is the source, implements or proceeds of the danger to health, safety or morals.

Interferes only with property rights although violation of tax laws may result to imprisonment.

Regulates both liberty and property.

2.

Taxation may be enhanced through the exercise of police power Illustration. If under police power, local government can classify lands as residential and commercial, then, since conversion of industrial land is usually assessed on higher assessment level, tax collections are increased.

3.

Taxation may be used as an implement of the police power and eminent domain

11

Power to destroy may be included if tax is used validly as an implement of police power.

b. c.

Judicial review 1. Courts cannot review the wisdom of or advisability or expediency of a tax SC is only allowed to settle actual controversies involving rights which are legally demandable and enforceable and may not annul an act of the political departments simply because the Court feels it is unwise or impractical.

2.

Requirements of questioning constitutionality a. There must be actual controversy falling for exercise of judicial review; b. Question before Court must be ripe for adjudication; 7 c. Locus standi of a private citizen questioning the act; d. Question of constitutionality must be raised at the earlier opportunity; and e. Issue of constitutionality must be the lis mota of the case.

A private person is allowed to raise constitutional questions only if he can show that he has personally suffered some actual or threatened injury as a result of the allegedly illegal conduct of the government, injury is fairly traceable to the challenged action and injury is likely to be redressed by a favorable action. Party must show not only that law or act is invalid butalso that he has imminent danger of sustaining some direct injury as a result of its enforcement and not merely that he suffers in some indefinite way. 3.

Moot and academic case GR: Courts decline jurisdiction on the ground of mootness EXCEPTION: Not moot and academic if: a. There is a grave violation of the Constitution;

7

Party’s personal and substantial interest in a case such that he has sustained or will sustain direct injury as a result of the governmental act being challenged; Right of appearance in a court of justice on a given question; in private suits, standing is governed by real parties in interest (SEC 2, RULE 3); REAL PARTY: party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit. INTEREST: material interest in an issue affected by the decree. MERE INTEREST: mere interest in the question involved or mere incidental interest.

d.

Exceptional character of the situation and the paramount public interest is involved; When constitutional issue raised requires formulation of controlling principles to guide the bench, the bar and the public; and Case is capable of repetition yet evading review.

4.

Judicial proceedings not required Collection of taxes levied should be summary and interfered with as little as possible. However, taxpayers and State are not prohibited from seeking remedies from courts.

5.

Quantum of evidence: preponderance of evidence PREPONDERANCE OF EVIDENCE: weight, credit and value of the aggregate on either side; testimony adduced by one side is more credible and conclusive than that of the other.

6.

No estoppel against the government Government is not estopped by mistakes or errors of its agents. Erroneous application of the law by public officers do not bar the subsequent correct application of statutes. Principle of Estoppel does not apply when State acts to rectify mistakes, errors, irregularities or illegal acts of its officials and agents. Rule holds true even if rectification prejudices parties who had meanwhile received benefits. This is particularly true in collection of legitimate taxes due where collection has to be made whether or not there is error, complicity or plain neglect on part of collecting agents. However, this rule may be relaxed in the interest of justice and fair play, as where injustice will result to the taxpayer.

Taxpayer’s suit Citizen and taxpayer suits Plaintiff in a taxpayer’s suit Plaintiff is affected by the expenditure of public funds. Right a citizen and a taxpayer to maintain an action in courts to restrain the unlawful use of public funds to his injury cannot be denied

Plaintiff in citizen’s suit He is but the mere instrument of public concern. In a matter of mere public right, people are real parties. It is the right, if not the duty, of every citizen to interfere and see that public offense be properly pursued and punished and that public grievance be remedied

12

DIRECT INJURY TEST: for a private individual to invoke judicial power in determining the validity of an executive or legislative action, he must have sustained direct injury and it is not sufficient that he has general interest common to all members in public.

Brushing aside technicalities Requirement of locus standi may be waived in the exercise of court discretion, where transcendental importance prompted the Court to act liberally. Requirements 1. Cases involve constitutional issues; 2. For taxpayers, there must be a claim of illegal disbursement of public funds or that tax measure is unconstitutional; 3. For voters, there must be a showing of obvious interest in the validity of election law in question; 4. For concerned citizens, there must be a showing that issues raised are for transcendental importance which must be settled early; and 5. For legislators, there must be a claim that official action complained of infringes upon their prerogatives as legislators.

Taxpayer need not be a party to the contract to challenge its validity. As long as taxes are involved, people have the right to question contracts entered into by the government.

Transcendental importance Determinants 1. Character of funds or other assets involved in the case; 2. Presence of a clear case of disregard of a constitutional or statutory prohibition by the public respondent agency or instrumentality of the government; and 3. Lack of any other party with a more direct and specific interest in raising the questions being raised.

It is not proper to implead the President as respondent GR: The President, during his actual incumbency, may not be sued in any civil or criminal case. EXCEPTION: He remains accountable to the people but he may be removed from office only by impeachment.

Decision to entertain a taxpayer’s suit is discretionary upon court.

Questioning the validity and constitutionality of statutes by a taxpayer GR: Locus standi must be present EXCEPTION: Misapplication of funds GR: Not only persons individually affected, taxpayers must have sufficient interest in preventing the illegal expenditure of moneys raised by taxation and they may, therefore, question the constitutionality of statutes requiring expenditure of public moneys. To justify the suit, it is necessary that public funds should be involved. Requisites of taxpayer’s suit 1. Tax money is being extracted and spent in violation of specific Constitutional protections against abuses of legislative power; 2. Public money is being deflected to any improper purpose; and 3. Petitioner seeks to restrain respondents from wasting public funds through enforcement of an invalid or unconstitutional law. Expenditure of public funds by an officer of the State for the purpose of executing an unconstitutional act constitutes a misapplication of such funds.

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CHAPTER 2 INHERENT LIMITATIONS ON THE POWER OF TAXATION A. THE POWER TO TAX HAS LIMITS  The power to tax is an inherent power but such power must still be exercised in accordance with the inherent and constitutional limitations  If there exists conflicting interest between the taxing authorities and taxpayers, it must be resolved in favor of the real purpose of taxation, which is, promotion of common good. 

 



Test to determine existence of Public Purpose o Duty test – if it is the duty of the government to provide such thing o Promotion of General Welfare Test – if proceeds will directly promote the public’s welfare



Purposes of levying tax: o regulatory purpose o raise government revenue o support government existence o rehabilitate/stablize a threatened industry, which is affected with public interest



If purpose of the tax is not stated, it is presumed that it is created for a public purpose Examples (presumption of public purpose) o Pensions of war veterans  assurance that a person’s patriotism will be acknowledged and rewarded o Unemployment relief o Support for the handicapped o Care for the aged o Scholarships for poor but deserving citizens o Tax on sugar o Oil Price Stabilization Fund  oil industry is imbued with public interest, and a dramatic increase in oil prices will result to economic crisis



Violation of any or all of the above is a. equal to taking without due process b. infringement of the general principles of int’l law which form part of the law of the land

C. LEVIED FOR A PUBLIC PURPOSE  Amount raised must o Inure to the benefit of the public o Used for  Support of the state  Some recognized object of the Government  Public service 

“public purpose” includes “indirect public advantage” o if an individual directly enjoys the tax, it is still valid as long as there is a link to public purpose

2 Kinds of Limitations: o Constitutional Limitation – those provided for in the Constitution o Inherent Limitations – restrictions to the power to tax attached to its nature

B. THE INHERENT LIMITATIONS (Le-N-T-Ex-Ice) 1. (Le) Levied for a public purpose 2. (N) Non-delegability of the taxing power 3. (T) Territoriality or situs of taxation 4. (Ex) Tax exemptions of the Government 5. (Ice) International Comity 



You cannot use public funds to promote an individual’s interest, even if it may incidentally result to the benefit of the public Rationale: tax can be levied against one class of individuals in favor of another class; you can ruin one class while favoring the other If it is for a private purpose, it is robbery because government takes property of another and then gives it in favor of another person.



The public purpose must exist at the time the law was enacted. o Government may only use public funds for a public purpose o The existence of public purpose determines its validity, not the incidental benefit to the public

D. NON DELEGABILITY OF TAXING POWER

  

Source of Power  People Delegation  Transferred from the people to Congress Basis: delegata potestas non potest delegari.



Theories that justify the delegation:

14

o

o







Power to fill up the details- subjects of less interest in which general provision may be made, thus those who are to act under such general provision, has the power to fill up the details. Power of Contingent Legislation- what is delegated is the task of ascertaining the facts that bring its declared policy into operation.

Delegable Powers: (Ta-Em-Trea-LIA) a. (Ta) Tariff Powers-reason for its delegation is necessity. b. (Em) Emergency Power- President can exercise this power in times of war or other national emergency, as authorized by Congress through law. (Sec23(2) ArtVI, 1987 Constitution) c. (Trea) Treaty and Executive Agreement Powers-Power of President to enter in to executive agreements, and to ratify treaties. (Sec21, ArtVII, 1987 Constitution) d. (L) Local taxing power- Theory of non-delegation of legislative power does not apply in local units. Reason- LGU not sovereign entities. e. (I) Initiative and Referendumo Initiative- power of the people to propose and enact legislation without action by the legislature. o Referendum- power of the people to approve or reject any act of the legislature, and also to approve or reject legislation that the legislature has referred to them. f. (A) Administrative Matters: o Valid as regards: i. Valuation of property pursuant to fixed rules ii. Equalization of assessments by a central body iii. Collection of taxes Test to determine permissible delegation: a. Completeness test- The law must be complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate b. Sufficiency standard test -The law must fix a standard. The limits of which are sufficiently determinate and determinable to which the delegate must conform in the performance of his functions. Non-Delegable Powers: a. Selection of property or transaction to be taxed b. Determination of purposes

c. d.



Rate of taxation Rules of taxation

Prohibition on Executive Legislation and Judicial Legislation o Based on separation of powers of state. o Law-making power-legislative branch o Law-executing power- executive branch o Law-interpreting power- judicial branch

E. TERRITORIALITY OR SITUS OF TAXATION

    

General rule: A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercised or enjoyed. Taxation is an act of sovereignty which could only be exercised within state’s territorial boundaries. Taxes are paid for the protection and services provided by the taxing authority which could not be provided outside the territorial limits of the taxing power. Situs of taxation: situs is latin term which means “situation,” “location or place.” Determination of situs: (S-NCR-L) o (S) Subject matter of the tax- Situs may depend on what is being taxed: excise/privilege, business, occupation, person, act or activity. o (N) Nature/kind/ classification of the tax- situs may depend on what tax is being levied: income tax, import duty, sales tax or real property tax. o (C) Citizenship of the tax payer- situs may depend on which state the taxpayer is a citizen of, or probably an alien, dual citizen, stateless or refugee. o (R) Residenxe of the taxpayer- situs may depend on the residence of the taxpayer: resident, non- resident. o (L) Location of the property- situs may depend on the palce the thing or property is located: within the Philippines or outside the Philippines. F. GOVERNMENT EXEMPTION



It is a matter of public policy. o Property belonging to the State or any of its political division intended for government use and purposes is generally exempt from taxation. o express provision of law needed to satisfy the rule.

15



Always remember that “Exemption is the rule and taxation is the exception.”

o



Reasons for exemption (A-Nore-So-Re) o (A) Avoid transferring money from one pocket to another. o (Nore) No revenue. o (So) So as not to unduly impede govt functions. o (Re) Reduce amount of money to be handled.

o



Exception to the (General Rule) Exemption o The rule on the exemption of government is not absolute. o The government may tax itself. Clearly, exemption applies only to government entities which immediately and directly exercise its government powers. o GOCCs, agencies, or instrumentalities are subject to taxation under the NIRC and LGC. However, only income from proprietary activities and not from essential governmental functions are taxable.



Definition of Terms o RP (Republic of the Philippines) – corporate government entity through which the functions of government are exercised throughout the Philippines. o NG (National Government) – entire machinery of the central government as distinguished from different forms of local government o GOCC (Government-Owned and Controlled Corporations) – any agency organized as a stock or non-stock corporation o GA (Government Agency) – any of the various units of the government including a department, bureau, office, instrumentality, or GOCC, or LGU or a distinct unit therein.

The Philippines adopts the generally accepted principles on international law as part of the law of the land. The Philippines adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations.

G. INTERNATIONAL COMITY



DSE (Doctrine of Sovereign Equality) o In par parem non habet imperium or “as between equals there is no sovereign” o Foreign sovereign does not subject itself to another.



DSI (Doctrine of Sovereign Immunity) o The State cannot be sued without its consent. o The State can do no wrong. o Based on practicality because of the difficulty of enforcing tax laws.



IC (Incorporation Clause)

16

12. Voting requirement in connection with the legislative grant of tax exemption 13. Non – impairment of the jurisdiction of the Supreme court in tax cases; 14. Exemption from taxes of the revenues and assets of educational institutions, including grants, endowments, donations and contributions

CHAPTER 3 CONSTITUTIONAL LIMITATIONS

DUE PROCESS 8

The power to tax involves the power to destroy. These were the famous words penned by the great Chief Justice Marshall in 1819. As discussed in the preceding chapters, the power to tax is the strongest of all the inherent powers of the State. As being unlimited in its range, the 1987 Constitution has vested this power to the people who pay it, through their 9 representatives, the Legislature. Though the taxing power is characterized as such an 10 awesome power, it is not unconfined.

In the previous chapter, we have already discussed that taxing power, although plenary in nature, is still subject to certain limitations. Some of these limitations are not to be found in any statute, thus the term inherent limitations. In this chapter, we are now to discuss the second type of limitations of the taxing power of the State – The Constitutional Limitations on Taxation. The 1987 Philippine Constitution provides the following limitations:

1. 2. 3. 4. 5. 6. 7.

Due process; Equal protection; Freedom of speech and of the press; Non – infringement of religious freedom and worship; Non – impairment of contracts; Non – imprisonment for dent or non – payment of poll tax; Appropriations, revenue, and tariff b ills shall originate exclusively originate from the house of representatives; 8. Uniformity, equitability, and progressivity of taxation; 9. Power of Congress to delegate to the President the authority to fix tariff rates, import and export quotas, etc.; 10. Veto power of the President; 11. Tax exemption of properties actually, directly, and exclusively used for religious, charitable, and educational purposes;

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

In order that a tax statute may be validly imposed on the people, it must be lawful. In other words, a tax law passed by the Congress of the Philippines must first be constitutional. Under Section one (1) of the Bill of Rights (Art. III, 1987 Philippine Constitution), the tax law must undergo due process for it amounts to an individual’s property (though minimal) being deprived from him. The due process clause is a constitutional safeguard of the people from the government, which is the taxing authority. If so proved that the tax law is violative of this constitutionally protected right, under the principle of ubi jus ibi remedium, it shall be struck down. As in the words of Justice Bradley, “In judging what is ‘due process of law’, respect must be had to the cause and object of the taking, whether under the taxing power, the power of eminent domain, or the power of the assessment fir local improvements, or some of these; and, if found to be suitable or admissible in the special case, it will be adjudged to be ‘due process of law’, but if found 11 arbitrary, oppressive, and unjust, it may be declared to be not ‘due process of law’.”

ASPECTS OF DUE PROCESS There are two aspects under the due process clause – substantive and procedural. Substantive Due Process is the aspect which prohibits the State from encroaching on the fundamental liberties provided for by the constitution. Simply put, in order that a tax statute be constitutional, it must be reasonable, fair and just, and not be harsh nor oppressive. In the event that taxes collected, or to be collected, are confiscatory in nature, such obligation enforced upon the tax payer is violative of the due process principle, and is therefore 12 unconstitutional.

8

McCulloch v. Maryland, 17 U.S. 4 Wheat. 316 316 (1819). MCIAA v. Marcos, 330 Phil. 392, 404 (1996). 10 Dizon, E. (2013). THE CONSTITUTIONAL LIMITATIONS OF TAXATION. In Taxation Law Compendium (2013 ed., Vol. 1). Rex Book Store. 9

1111 12

Davidson v. New Orleans, 96 US 97 (1878). Reyes, et al. v. Almanzor, et al., G.R. Nos. 49839 – 46, 26 APR 1991.

17

Procedural due process, on the other hand refers to the procedural limitations 13 placed on the manner in which a law is administered, applied or enforced. It is but elementary in democratic forms of government that laws, especially those which impose a tax obligation on its citizenry, be exercised in accordance with the prescribed procedure. This is mandatory. To do otherwise shall give rise to a right which the taxpayer may use to ask the Courts its succor. The tax collector may be stopped if the taxpayer can demonstrate that the 14 law has not been observed. In a case decided by the Supreme Court, it held that due process was not observed when the trial court classified certain properties of the Roman Catholic Church were tax – exempt under the 1973 constitution where no court hearing was 15 conducted thereon.

the proper value of a taxable item or property, such act is considered as judicial in nature. Thus, due process is satisfied by giving the opportunity to the taxpayer to be heard 17 respecting such assessment.

PROCEEDINGS IN TAX CASES Due process in taxation does not mean nor require that a full blown judicial proceeding be done. Generally, such cases are settled summarily and must be interfered with 18 as little as possible. As government projects are mainly fueled by the revenue generated by taxes paid by individual taxpayers, the delay which is normally present in judicial proceedings 19 are not required in the enforcement of taxes and assessments and are frowned upon. No 20 government could exist if all litigants were permitted to delay the collection of its taxes.

RULES OF DUE PROCESS IN TAXATION The exercise of the State of its inherent power to tax its constituency must conform to the following rules:

a.) b.) c.) d.)

It must be for a public purpose; Operates uniformly to all who are under its purview; Exercised only within the jurisdiction of the duly authorized taxing authority In the assessment and collection of taxes, notice and hearing shall be provided the taxpayer to guarantee against injustice e.) Publication is not merely directory, but mandatory; f.) There must be a right to appeal given to the taxpayer in cases where it is 16 proper, being a statutory, and not a natural right.

It is good to take note, that although the taxpayer is granted the right to have due notice and hearing, such is only guaranteed when the tax to be imposed shall substantially affect him. In other words, when the tax to be imposed by the government is not one which could be changed by hearing the taxpayer, its absence does not violate the constitutional safeguard. A person’s right to due process is therefore not invaded. However, if such tax would be in the nature of an ad valorem tax which utilizes the use of assessors to ascertain 13

Dizon, E. (2013). THE CONSTITUTIONAL LIMITATIONS OF TAXATION. In Taxation Law Compendium (2013 ed., Vol. 1). Rex Book Store. 14 Commissioner of Internal Revenue v. Algue, Inc., G.R. No. L – 28896, 17 FEB 1988. 15 Province of Abra v. Hernando, etc., et al., G.R. No. L – 49336, 31 AUG 1981. 16 Bello v. Francisco, 4 SCRA 134; Rodriguez v. Director of Prisons, 47 SCRA 153.

PRESUMPTION OF VALIDITY OF TAX LAWS; RETROACTIVITY The courts of law will not declare a statute, passed in accordance with the manner set out by the Constitution, unconstitutional for being in violation of the due process clause 21 on mere allegations by the taxpayer. Every statute passed by the Congress enjoys the presumption of validity, including tax laws. The burden of proving that the law is unconstitutional shall be borne by the taxpayer in accordance with our rules on evidence. Also, the mere fact that a tax statute is expressed to be retroactive in its application is not proof in itself that the law is unconstitutional.

EQUAL PROTECTION

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

17

Dizon, E. (2013). THE CONSTITUTIONAL LIMITATIONS OF TAXATION. In Taxation Law Compendium (2013 ed., Vol. 1). Rex Book Store. 18 Churchill and Tait v. Rafferty, 32 Phil. 580, 585, 21 DEC 1915. 19 Dizon, E. (2013). THE CONSTITUTIONAL LIMITATIONS OF TAXATION. In Taxation Law Compendium (2013 ed., Vol. 1). Rex Book Store. 20 Lorenzo v. Posadas, 64 Phil. 353, 368 18 JUN 1937. 21 Dizon, E. (2013). THE CONSTITUTIONAL LIMITATIONS OF TAXATION. In Taxation Law Compendium (2013 ed., Vol. 1). Rex Book Store.

18

nd

The second (2 ) constitutional limitation is found under the same provision of the 1987 Constitution as the due process clause. Aptly stated, not person shall be denied of the equal protection of laws. The equal protection clause requires that persons similarly situated 22 should be treated alike, both as to rights conferred and responsibilities imposed. It does not, however, require equal treatment of all persons, regardless of their situation. The Constitutional safeguard merely requires that all persons who are within the ambit of the statute shall be treated alike, under like circumstances and conditions, both with respect to 23 the privileges acquired and liabilities imposed.

DIMENSIONS OF TAX EQUITY AND FAIRNESS Aside from the aforementioned goals, it has been recommended that the following dimensions be considered in determining tax equity and fairness a.) b.) c.)

The power of the State to classify, in relation to taxation, property and persons to be taxed, the rates of such taxes, as well as the methods of assessment, valuation, and 24 collection is unquestioned, but is not absolute. Such classification must be based upon real and substantial differences between the persons, property or privileges, and those not taxed must bear some reasonable relation to the object or purpose of legislation or to some 25 permissible governmental policy or legitimate end of governmental action. Thus, the equality of taxation rule is not violated if classifications or distinctions made are based on 26 substantial and reasonable differences.

GOALS IN DISTRIBUTION Two different goals in distribution arise when “fairness” or “equality” are looked at, vertical and horizontal. The latter refers to the fair treatment of tax payers with the like ability to pay. It prohibits the discrimination on the grounds such as race, gender, occupation, 27 28 etc. Stated differently, those similarly situated shall be similarly taxed. Meanwhile, the former refers to the relative tax burden of tax paying units with different abilities to pay. 29 Vertical equity seeks to tax in a proportional or progressive way.

22

Ichong v. Hernandez, 101 Phil. 1155. Sison, jr. v. Ancheta, G.R. No. 59431, 25 JUL 1984. 24 Aban, B. (1994). Law of Basic Taxation in the Philippines (2001 ed.). National Book Store. 25 See Thomas P. Matic, Jr., Taxation in the Philippines (Vol. I, pp. 79 – 80). 26 Aban, B. (1994). Law of Basic Taxation in the Philippines (2001 ed.). National Book Store. 27 Dizon, E. (2013). THE CONSTITUTIONAL LIMITATIONS OF TAXATION. In Taxation Law Compendium (2013 ed., Vol. 1). Rex Book Store. 28 See AICPA Guiding Principles for Tax Equity and Fairness (2007), p. 3. 29 Dizon, E. (2013). THE CONSTITUTIONAL LIMITATIONS OF TAXATION. In Taxation Law Compendium (2013 ed., Vol. 1). Rex Book Store.

d.) e.)

Exchange Equity and Fairness – Taxpayers must, over the long run, receive the appropriate value for the taxes they pay; Process Equity and Fairness – Taxpayers have a voice within the tax system, are given due process and are treated with respect by the tax administrators; Time – Related Equity and Fairness – Taxes are not unduly distorted when income or wealth levels fluctuate over time; Inter – Group Equity and Fairness – No group of taxpayers is favored to the detriment of another without good cause; and, Compliance Equity and Fairness – All tax payers pay what they owe on a timely 30 basis.

REQUIREMENTS OF VALID CLASSIFICATION OR DISTINCTION As stated earlier, the State may validly classify or discriminate among its subjects so long as such is based on a rational basis. “The equal protection clause does not require the universal application of the laws, that is, that it operates on all people without distinction. 31 Such an effect might in fact sometimes result in unequal protection.” Thus, in order that a classification to be a valid one, it must conform to the following: a.) b.) c.) d.)

That it must be based on substantial distinctions; It must be germane it the purpose of the law; It must not be limited to the preexisting conditions; and, 32 It must apply equally to all members of the class.

FREEDOM OF SPEECH AND OF THE PRESS

23

No law shall be passed abridging the freedom of speech, of expression, or of the press, or the right of the people peaceably to assemble and petition the government for 30

Ibid. Cruz, I. (2000). Constitutional law (2000 ed., p. 125). Quezon City, Metro Manila, Philippines: Central Lawbook Pub. 32 Ormoc Sugar Co. Inc. v. Treasurer of Ormoc City, et al., L – 23794, 17 FEB 1968. 31

19

redress of grievances (Section 4, Article III, 1987 Constitution)

There are four (4) primary reasons why freedom of expression, which encompasses speech, the press, assembly and petition, is essential to a free society. First, the self – expression of an individual enables him to realize his full potential as a human being. Second, enlightened judgment is possible if one considers all the facts and ideas and test’s one’s own against it. It is vital to the attainment and advancement of knowledge. Third, it is necessary to our system of governance. Democratic Societies’ development and advancement is largely dependent on how well – informed its citizenry is for if it would be otherwise, the result would be tyranny and oppression. Lastly, it serves as a safeguard system of the public, developing a system of “checks and balances” against the possible corrupt practices of the 33 State.

The provision of the constitution necessarily includes the liberty of the press which is principally, although not exclusively, immunity from prior restraint and/or subsequent 34 censorship. To discuss further, it is not the censorship of the press per se which is the evil sought to be prevented. It refers to any action of the government by means of which it might prevent such free and general discussion of public matters as seems absolutely essential to 35 prepare the people for an intelligent exercise of their rights as citizens.

CURTAILMENT OF FREEDOM Briefly put, immunity is granted to the press so as to help promote and develop an informed citizenry. They exist as a vital source of public information. It sheds more light on the public and business affairs of the nation than any other instrumentality of publicity. Public opinion, as the most potent of all restraints against the corrupt actions and practices of the government, is afforded protection by nothing less than the constitution itself. A free press stands as one of the great interpreters between the government and the people. To treat it otherwise, as to subject it to taxes, would amount to suppression and abridgement of publicity results to the curtailment of press freedom and freedom of speech and of 36 expression.

It has been held though that although granted immunity from certain taxes, they can still be subject to general taxes. However, taxes that may still be validly imposed upon them must be fair, reasonable, and just, and in accordance with the person’s right to the equal protection of laws. It must not be used as a tool to abridge the freedom of press under the guise of valid tax, as when it is exercised by the state arbitrarily and capriciously, singling out the press from other businesses or if such taxes are imposed only on a select few press members. In such case, the Supreme Court has acknowledged the potential for abuse is 37 present in differential taxation of the press.

RELIGIOUS FREEDOM

No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship without discrimination or preference shall forever be allowed. No religious test shall be required for the free exercise of civil or political rights (Sec 5, Art. III, 1987 Philippine Constitution)

In accordance with the above stated provision, our Constitution and laws provide an exemption from taxation properties which are devoted exclusively for religious purposes. This grant of immunity of the fundamental law of the land and other tax laws were made to further realize the declared principle of the State which is The Separation of the Church and 38 the State.

The Constitutional provision, like Sec. 1 of the Bill of Rights, can be further divided in to 2 clauses: (a) the Non – Establishment clause; and (b) the Free Exercise clause.

NON – ESTABLISHMENT CLAUSE The non – establishment clause, in general, merely prohibits the State, or any of its instrumentalities and political subdivisions, from setting up a church. Necessarily, it includes prohibitions such as: a.)

The State cannot pass a law which aid nor discriminate a religion;

33

Dizon, E. (2013). THE CONSTITUTIONAL LIMITATIONS OF TAXATION. In Taxation Law Compendium (2013 ed., Vol. 1). Rex Book Store. 34 Near v. Minnesota, 283 U.S. 697, 283 U.S. 707. 35 Cooley’s Constitutional Limitations, 8th ed. P. 866 36 Ibid.

37

Robert M. Howie, Leathers v. Medlock: The Supreme Court Changes Course on Taxing the Press, 49 Wash. & Lee L. Rev. 1053 (1992), citing Minneapolis Tribune Co. v. Minnesota Commissioner of Revenue, 460 U.S. 575 (1983) 38 Sec. 6, Art II, 1987 Philippine Constitution

20

b.) c.) d.)

It cannot force a person, nor influence him, to join, remain, or to leave a church or religious sect; It cannot, openly or secretively, participate in the affairs of any religion or church; and, No tax in any amount, large or small, can be levied to support any religious activities or institutions, whatever they may be called, or whatever form they 39 may adopt to teach or practice religion.

REQUISITES FOR CONSTITUTIONALITY The wall of separation that must be maintained between church and state “is a blurred, distinct, and variable barrier depending upon the circumstances of a particular 40 41 relationship.” The case of Lemon v. Kurtzman enunciated in a three – part test to assess whether a law violates the Establishment clause: 1.) 2.) 3.)

Does the law have a secular purpose? Is the Primary effect either to advance religion or to inhibit religion? Does the law foster an excessive governmental entanglement with religion?

If any of these questions are answered in the negative, then the law becomes unconstitutional as it violates the Establishment Clause

exercise of religion. Albeit, like the press, religious groups may still be subject to general taxes depending upon the circumstances.

Properties Actua PROHIBITION AGAINST IMPAIRMENT OF OBLIGATION OF CONTRACTS No law impairing the obligation of contracts shall be passed. [Section 10, Article III, Constitution] The power of taxation cannot be exercised in a manner that would impair the obligation of contracts. What is prohibited is that a taxing statute be passed that would alter the relative rights of the parties with each other. The mere fact that a tax makes the conduct of a business more expensive or makes an activity more difficult does not result in the impairment of the obligation of contracts. Contract is impaired only if the relative position of the parties to a contract (i.e. equality that is assumed when the contract was entered into) is disturbed by the operation of a taxing statute. 

The obligation of a contract is impaired when its terms or conditions are changed

FREE EXERCISE CLAUSE

by law or by a party without the consent of the other, thereby weakening the

The Free Exercise clause, on the other hand, withdraws from the legislative power, state and federal, the extortion of any restraint on the free exercise of religion. It bars “governmental regulation of religious beliefs as such, prohibiting the misuse of secular governmental programs “to impede the observance of one or all religions even though the 42 burden may be characterized as being only indirect.

position or rights of the latter. 

An example of impairment by law is when a later taxing statute revokes a tax exemption based on a contract. But this only applies when the tax exemption has been granted for a valid consideration.



A later statute may revoke exemption from taxation provided for in a franchise

RELIGIOUS GROUPS ARE EXEMPT TO PAY TAXES

because the Constitution provides that a franchise is subject to amendment,

Generally, religious groups, sects, and like organizations are exempt from paying taxes like Income tax, license fees, and similar taxes as it imposes a burden on the free

alteration or repeal.

39

see Everson v. Board of Education Dizon, E. (2013). THE CONSTITUTIONAL LIMITATIONS OF TAXATION. In Taxation Law Compendium (2013 ed., Vol. 1). Rex Book Store. 41 403 U.S. 602 (1970) 42 See Dizon, citing Sherbert v. Verner 374 U.S. 398, 402 (1963), Braunfeld v. Brown, 366 U.S. 599, 607 (1961) 40

RULES: a. When the exemption is bilaterally agreed upon between the government and the taxpayer – it cannot be withdrawn without violating the non-impairment clause.

21

b.

When it is unilaterally granted by law, and the same is withdrawn by virtue of another law – no violation. When the exemption is granted under a franchise – it may be withdrawn at any time thus, not a violation of the non-impairment of contracts

c.

Note: A latter statute may revoke exemption from taxation provided for in a franchise because the Constitution provides that a franchise is subject to amendment, alteration or repeal. [Sec. 11 Art. XII] Case Reference OPOSA vs. FACTORAN 

Police power prevails over the non-impairment clause



Tolentino v. Sec. of Finance, supra: 1 issue that was raised was whether the imposition of the VAT on sales & leases on real estate by virtue of contract s entered into prior to the effectivity of the law would violate the non-impairment of contracts rule in the constitution. HELD:  



LA INSULAR vs. MANCHUCA 

As a rule, the obligation to pay tax is based on law. But when, for instance, a taxpayer enters into a compromise with the BIR, the obligation of the taxpayer becomes one based on contract.

A lawful tax on a new subject or an increased tax on an old one, does not interfere

It is enough to say that parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the state. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace & good order of society.

with a contract or impairs its obligation. 

The constitutional guarantee of the non-impairment clause can only invoked in the

Revenue bills shall originate exclusively from the House of Representatives

grant of tax exemption. Section 24, Article VI, Constitution - All appropriation, revenue or tariff bills, bills authorizing RULES:

an increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with

1.

2.

3.

If the exemption was granted for valuable consideration and it is granted on the basis of a contract.  cannot be revoked If the exemption is granted by virtue of a contract, wherein the government enters into a contract with a private corporation  cannot be revoked unilaterally by the government If the basis of the tax exemption is a franchise granted by Congress and under the franchise or the tax exemption is given to a particular holder or person can be unilaterally revoked by the government (Congress)  The non-impairment clause applies only to contracts and not to a franchise.  The non-impairment clause applies to taxation but not to police power and eminent domain.  Furthermore, it applies only where one party is the government and the other, a private individual.

amendments. Case References Tolentino v. Secretary of Finance 

The Constitution simply means that the initiative for the filing of bills must come from the House of Representatives, on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems.



It is not the law – but the revenue bill – which is required by the Constitution to originate exclusively in the House of Representatives, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole, and a distinct bill may be produced.

22



The Constitution does not also prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, as long as action by the Senate is withheld until receipt of said bill. [Tolentino v. Secretary of Finance]

whether from business, exercise of profession or from property which in no case shall exceed Five thousand pesos (P5,000.00). In the case of husband and wife, the additional tax herein imposed shall be based upon the total property owned by them and the total gross receipts or earnings derived by them.

Presidential power to grant reprieves, commutations and pardons and remit fines and forfeitures after conviction (ART. VII, SEC. 19, 1987 CONSTITUTION) Due Process Equal Protection Uniformity Taxpayer may not be Taxpayers shall be treated alike Taxable articles, or kinds of deprived of life, liberty under like circumstances and property of the same class, or property without conditions both in the shall be taxed at the same due process of law. privileges conferred and rate. There should Notice must, liabilities imposed. therefore, be no direct therefore, be given in double taxation case of failure to pay taxes PROHIBITION AGAINST IMPRISONMENT FOR NON-PAYMENT OF POLL TAX Section 20, Article III, Constitution. No person shall be imprisoned for debt or non-payment of poll tax. The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge, but not to other violations like falsification of community tax certificate and nonpayment of other taxes. Community Tax v. Poll Tax 

Poll tax is a tax of fixed amount imposed on residents within a specific territory

Section 158. Juridical Persons Liable to Community Tax. - Every corporation no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual community tax of Five hundred pesos (P500.00) and an annual additional tax, which, in no case, shall exceed Ten thousand pesos (P10,000.00) in accordance with the following schedule: (1) For every Five thousand pesos (P5,000.00) worth of real property in the Philippines owned by it during the preceding year based on the valuation used for the payment of real property tax under existing laws, found in the assessment rolls of the city or municipality where the real property is situated - Two pesos (P2.00); and (2) For every Five thousand pesos (P5,000.00) of gross receipts or earnings derived by it from its business in the Philippines during the preceding year - Two pesos (P2.00). The dividends received by a corporation from another corporation however shall, for the purpose of the additional tax, be considered as part of the gross receipts or earnings of said corporation. Section 159. Exemptions. - The following are exempt from the community tax: (1) Diplomatic and consular representatives; and (2) Transient visitors when their stay in the Philippines does not exceed three (3) months.

regardless of citizenship, business or profession. Example is community tax. 

Community tax – Cities or municipalities may levy a community tax in accordance with the provisions of this article. 156 RA 7160.

Section 157. Individuals Liable to Community Tax. - (18) or over who has been regularly employed on a wage or salary basis for at least thirty (30) consecutive working days, or who is engaged in business or occupation, or who owns real property with an aggregate assessed value of One thousand pesos (P1,000.00) or more, or who is required by law to file an income tax return shall pay an annual additional tax of Five pesos (P5.00) and an annual additional tax of One peso (P1.00) for every One thousand pesos (P1,000.00) of income regardless of

Section 160. Place of Payment. - The community tax shall be paid in the place of residence of the individual, or in the place where the principal office of the juridical entity is located. 164 (c) The proceeds of the community tax actually and directly collected by the city or municipal treasurer shall accrue entirely to the general fund of the city or municipality concerned. However, proceeds of the community tax collected through the barangay treasurers shall be apportioned as follows: (1) (50%) shall accrue to the general fund of the city or municipality concerned; and

23

(2) (50%) shall accrue to the barangay where the tax is collected.

Tolentino v. Sec. of Finance, supra, 

Equity and uniformity in taxation means that all the taxable articles or kinds of properties of the same class be taxed at the same rate. The taxing power has the

UNIFORMITY AND EQUITY IN TAXATION same class, same rate classification of taxpayers, subject or items to be taxed

authority to make reasonable and natural classifications for purposes of taxation. To satisfy this requirement, it is enough that the statute or ordinance applies equally to all persons, firms, and corporations placed in a similar situation.

 



The rule of taxation shall be uniform and equitable (Sec.28 (1), Art. III, 1987 Constitution). The tax is uniform when it operates with the same force and effect in every place where the subject of it is found. "Uniformity" means all property belonging to the same class shall be taxed alike. It does not signify an intrinsic, but simply a geographic, uniformity (Churchill & Tait vs. Conception, 34 Phil. 969). Uniformity does not require the same treatment; it simply requires reasonable basis for classification. The concept of equality in taxation requires that the apportionment of the tax burden be more or less just in the light of the taxpayer’s ability to shoulder the tax burden and if warranted, on the basis of the benefits received from the government. Its cornerstone is the taxpayer’s ability to pay.



taxation & it has been repeatedly held that the inequalities which result from a singling out of 1 particular class for taxation or exception infringe no constitutional limitation. Manila Race Horse v. Dela Fuente – No arbitrary classification 

it was said there is equality and uniformity in taxation if all articles or kinds of property of the same class are taxed at the same rate.



The owners of boarding stables for race horses and, for that matter, the race horse owners themselves, who in the scheme of shifting may carry the taxation burden, are a class by themselves and appropriately taxed where owners of other kinds of horses are taxed less or not at all, considering that equity in taxation is generally conceived in terms of ability to pay in relation to the benefits received by the taxpayer and by the public from the business or property taxed.



Taking everything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution. Equity in taxation is generally conceived in terms of liability to pay in relation to the benefits received by the taxpayer and by the public from the business or property taxed.

Uniformity v. equity in taxation 

The concept of uniformity in taxation implies that all taxable articles or properties of the same class shall be taxed at the same rate. It requires the uniform application and operation, without discrimination, of the tax in every place where

It is inherent in the power to tax that the state be free to select the subjects of



the subject of the tax is found. It does not, however, require absolute identity or equality under all circumstances, but subject to reasonable classification.

Eastern Theatrical Co. Inc., vs. Alfonso The concept of equity in taxation requires that the apportionment of the tax burden be, more or less, just in the light of the taxpayer’s ability to shoulder the tax burden and, if warranted, on the basis of the benefits received from the government. Its cornerstone is the taxpayer’s ability to pay.



there is equality and uniformity in taxation if all articles or kinds of property of the same class are taxed at the same rate. Thus, it was held in that case, that "the fact that some places of amusement are not taxed while others, such cinematographs, theaters, vaudeville companies, theatrical shows, and boxing exhibitions and other kinds of amusements or places of amusement are taxed, is not argument at all against the equality and uniformity of tax imposition."

Case References

24



The taxing power has the authority to make reasonable and natural classifications for purposes of taxation.

Uniformity – all taxable articles or kinds of property of the same class are taxed at the same rate.

PEPSI-COLA

BOTTLING

CO.

OF

THE

PHILS.,

INC.

vs.

CITY

OF

BUTUAN

FACTS: The ordinance imposes taxes for every case of soft drinks, liquors and other carbonated beverages, regardless of the volume of sales, shipped to the agents and/or consignees by outside dealers or any person or company having its actual business outside the City.

Equitability – the burden falls to those who are more capable to pay. Progressivity – rate increases as the tax base increases.

ISSUE: Does the tax ordinance violate the uniformity requirement of taxation? HELD: Yes. The tax levied is discriminatory.  Even if the burden in question were regarded as a tax on the sale of said beverages, it would still be invalid, as discriminatory, and hence, violative of the uniformity required by the Constitution and the law therefor, since only sales by "agents or consignees" of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales, and even if the same exceeded those made by said agents or consignees of producers or merchants established outside the City of Butuan, would be exempt from the disputed tax. 



It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity or equality under all circumstances, or negate the authority to classify the objects of taxation. The classification made in the exercise of this authority, to be valid, must, however, be reasonable and this requirement is not deemed satisfied unless: o

(1) it is based upon substantial distinctions which make real differences;

o

(2) these are germane to the purpose of the legislation or ordinance;

o

(3) the classification applies, not only to present conditions, but, also, to future conditions substantially identical to those of the present; and

o

(4) the classification applies equally to all those who belong to the same class.

Summary and Q&A Uniformity, Equitability And Progressivity Of Taxation (Art. VI, Sec. 28(1), 1987 Constitution)

Q: Is a tax law adopting a regressive system of taxation valid? A: Yes. The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. The Constitutional provision means simply that indirect taxes shall be minimized. The mandate to Congress is not to prescribe, but to evolve, a progressive tax system. (EVAT En Banc Resolution, Tolentino, et al vs Secretary of Finance, October 30, 1995)

lly, Directly and Exclusively Used for Religious, Charitable and Educational Purposes Article VI. Section 28 (3) of the Constitution provides: Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. a.) Actually, Directly and Exclusively The phrase is construed as the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.

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The test of exemption is the ACTUAL and EXCLUSIVE use of the property. Exclusive is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and “exclusively” is defined, "in a manner to exclude; as enjoying a privilege exclusively.” Thus, if real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. Quoting the Supreme Court in Abra Valley College case, the lease of a portion of school to a commercial establishment is subject to tax. b.) The “Extension” Rule Prior to the 1973 and 1987 Constitution, the term “exclusively used” considers incidental use also and that the exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually indispensable therefor, but also extends to facilities which are incidental to and reasonably necessary for the accomplishment of such purposes. Case in point: Roman Catholic Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte

NOTE: The income of whatever kind and nature from any of their properties, real or personal or from any of their activities for profit regardless of the disposition made of such income shall be subject to tax. Thus, being a non-stock and non-profit corporation does not by itself completely exempt an institution from tax. An institution cannot use its corporate form to prevent its profitable activities from being taxed. In cases of gifts or donations: Donations in favor of religious and charitable institutions are generally not subject to tax provided, however, that not more than 30% of the said bequest, devise, or legacy or transfer shall be used for administration purposes. d.) Non-Violation of the Establishment Clause Walz vs Tax Commission of City of New York

The exemption in favor of the convent in the payment of the land tax, include not only the land actually occupied by the church, but also the adjacent ground (which is being used for a vegetable garden) destined to the ordinary incidental uses of man, comes under the exemption. Moreover, in regard to the lot which formerly was the cemetery, while it is no longer used as such, neither is it used for commercial purposes and, is now being used as a lodging house by the people who participate in religious festivities, which constitutes an incidental use in religious functions, also comes within the exemption.

The grant of tax exemption is not sponsorship of the organizations because the government does not transfer part of its revenue to churches but simply abstains from demanding that the churches support the State. Instead, the tax exemption creates a more minimal and remote involvement between church and state, far less than taxation of churches would entail, and it restricts the fiscal relationship between them, thus tending to complement and reinforce the desired separation insulating each from the other.

NOTE: The prevailing rule now is that the term “exclusively” does not cover incidental use. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized.

Revenue and Assets of Educational Institutions

c.) Exemption from other taxes 1997 NIRC states that the organizations below shall not be taxed with respect to income received by them: Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person.

Article XIV. Section 4 of the Constitution provides: All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. a.) Meaning and Coverage of Educational Institutions Such term, when used in laws granting tax exemptions, refers to schools, school seminary, college or educational establishment. CIR vs CA, YMCA Inc.

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The school system is synonymous with formal education, which refers to the hierarchically structured and chronological graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to the higher levels. NOTE: Incomes which are unrelated to school operations are taxable. b.) Requirements and Coverage of the Exemption The educational institution must prove the ff:  It is a non-stock, non-profit educational institution.  Income MUST be derived from activities and/or used actually, directly and exclusively for educational purposes. The exemption extends to incidental income from ancillary activities such as those derived from canteen, bookstore, dormitory and other facilities.

CIR vs Ateneo De Manila University A cafeteria/canteen is being leased by the school. Although it is owned and operated by a concessionaire, the canteen is exempted from income tax and VAT so as long as the rentals paid by concessionaire are actually, directly and exclusively used for educational purposes. Importation of books, films, slides and other educational materials and equipment such as computers to be actually, directly and exclusively used for educational purposes are LIKEWISE EXEMPT from customs duties, provided guidelines under DO 137-87 are observed. Interest income from Philippine currency bank deposits and yield from deposit substitute instruments used actually, directly exclusively are likewise exempt from 20% final withholding tax subject to certain requirements. c.) Taxability of Proprietary Educational Institutions A Proprietary educational institution is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment. The presence of the word “may” indicates only permissiveness, which means the Congress has the discretion to grant exemptions. These institutions, at present, are not exempt from income tax but only subject to a special lower rate. Preferential Tax on Income and Predominance Test Proprietary educational institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income. If the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the thirty (30%) normal income tax shall be imposed on the entire taxable income. The term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. Illustration: X Educational Institution earned a net income of 300 million pesos, 150 million of which came from unrelated activities. On that note, 10% tax shall be imposed on the 300 million. But, if 151 million came from unrelated activities, 30% tax shall be imposed on the 300 million.

Doctrinal Pronouncement on CIR vs St. Lukes Medical Center To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.

27

In order to be exempted from income tax, Sec. 30 (B) of the NIRC requires that both the organization and operations of the charitable institution must be devoted "exclusively" for charitable purposes. This is qualified by its last paragraph, which states that if a tax exempt charitable institution conducts "any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-profit activities. St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that a hospital which receives approximately P1.73 billion from paying patients is not an institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are income received from "activities conducted for profit." St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property, equipment or facilities used for services to paying and non-paying patients, then it cannot be said that the income is "devoted or used altogether to the charitable object which it is intended to achieve." The income is plowed back to the corporation not entirely for charitable purposes, but for profit as well. Government Educational Institutions Government educational institutions, like the University of the Philippines, are likewise exempted from taxes with respect to revenues derived pursuant to its educational purpose and revenues actually, directly and exclusively used therefor. Conversely, income from trade, business or other activity which is not related to their educational purposes or functions shall be subject to internal revenue taxes when the same is not actually, directly, exclusively used for the intended purpose/s. Transmissions to Educational Institutions



All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which insures to the benefit of any individual: Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes.

Non-Impairment of the Jurisdiction of the Supreme Court The Supreme Court can review judgments or orders of lower courts in all cases involving:  

The legality of any tax, impost, assessment, or toll; The legality of any penalty imposed in relation thereto (Sec. 5[2][b], Art. VIII, 1987 Constitution)

NOTE: These jurisdictions are concurrent with the Regional Trial Courts; thus, the petition should generally be filed with the RTC following the hierarchy of courts. However, questions on tax laws are usually filed direct with the Supreme Court as these are imporessed with paramount public interest. It is also provided under Sec. 30, Art VI of the Constitution that “no law shall be passed increasing the appellate jurisdiction of the Supreme Court without its advice and concurrence.”

Prohibitions against Imprisonment for Non-Payment of Poll Tax A person may be imprisoned for non-payment of internal revenue taxes, such as income tax as well as other taxes that are not poll taxes if expressly provided by law. A person cannot be sent to prison for failure to pay the community tax.

Sec. 87 of the NIRC is explicit: The following shall not be taxed:  The merger of usufruct in the owner of the naked title;  The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary;  The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and

Origin of Revenue and Tariff Bills

This is based on the theory that, elected as they are from the districts, the members of the House of Representatives can be expected to be more sensitive to the local needs and problems. NOTE: It is not the law but the revenue bill which must “originate exclusively” in the House of Representatives. The bill may undergo such extensive changes that the result may be a

28

rewriting of the whole. The Senate may not only concur with amendments but also propose amendments.

Chapter 4: Tax Exemptions, Escape from Taxation & Double Taxation Tax Exemption o Definition :  it is a grant of immunity,  express or implied,  to particular persons or corporations  from the obligation to pay taxes  in whole or in part o

Kinds of Tax Exemption:  As to Source: 1. Constitutional 2. Statutory 3. Treaty/Executive Agreements 4. Contractual (for a consideration)  As to Manner of Grant: 1. Express o Verbally/oral o In writing/ statutes 2. Implied o Manifested by conduct o Considering the totality of circumstances  As to Scope 1. Total/full/All-in/All the way o Relates to the whole/entire tax st 2. Partial/1 -base lang o Affects only a portion

Tax exemptions may be given to achieve long term economic objectives: Exemptions, incentives and the likes are given, by the state, occasionally  To attract new sexy business; as well as  To resuscitate the old and dying juridical bitches; and more importantly to  To sensually stimulate and elevate our economy – towards economic prosperity and progress. o It’s designed, not to trigger off an instant surge of revenues on a one night short term basis, but rather to achieve a longer term symbiotic relationship which is way better than a one night-er.

29

o

What is the task of the Court?  CIR vs. Procter and Gamble (204 SCRA 377)  The task of the court is to GIVE EFFECT to the legislative design and objectives as they are written into the statute ** EVEN IF SOME REVENUES are lost in that very smart process.  Because the congress knows what they’re doing. lol.  Basis: Separation of powers and stuff like that

Approaches for Exemption o P – I – Org - I 1. Exemptions of Property 2. Exemption of Individuals 3. Exemption of Organization 4. Exemptions of Income o



Exclusions and Deductions: o Exemption vs. Exclusion  Tax Exemption  Refers to a statutory exception from the payment of taxes; whereas  Exclusion  Refers to the Total absence/ or want/ or lack of taxation in a particular circumstance o example:  the non-inclusion in the taxpayer’s taxable gross income of gifts, bequest, and devises under Sec 32 (B)(3) of the NIRC o

o

Exemption vs. Deduction  Exemption  Refers to removal from taxation of a particular class or item; whereas  Deduction  Refers to the reduction of taxable items  by way of subtraction of other items. o example:  Under Section 34 NIRC: the ordinary business expenses and depreciation are deductable. Deduction & Exclusion; Nature:  They are in the nature of Tax Exemptions  Thus, they are STRICTLY CONSTRUED

Exemption of individuals - certain classes of individual may be granted tax exemption within the tax system which depends on multiple criteria.



o

Specific monetary exemptions - Monetary reduction of the tax base o Personal allowance o Which may be claimed to reduce the taxable income - Similar to the 50k basic personal exemption and the 25k additional exemption for every dependent under Section 35 of the NIRC. Tax exempt status - Includes the exemptions to senior citizens and minimum wage earners (RA 9994 & 9504) - A statute which provides a potential tax payer complete relief from tax, or a reduction on the rate, or a tax only on a portion of the items.

Exemptions of Organizations  An exemption to organizations which meets certain conditions imposed by the taxing authority  It may be based on definitions or restriction or characteristics set forth by law 1.

2.

Charitable, Religious and non-profit organizations: o These entities are considered to serve public purposes Government and its entities o General rule:

30



3.

4.

The government and its instrumentalities are exempt from tax and the local government may never ever ever ever tax the national government. Them boys only have delegated powers. The delegated powers cannot be superior to the powers of the one who delegated the power. Entities on pension schemes o Based on social justice. It complements social legislation. o Pensions which do not amount to income are not taxable. Educational institutions

o

Exemptions of Income  Includes:  Income earned outside the taxing jurisdiction  Income consisting of compensation for loss  Inherited shit / properties acquired by gifts  Income earned in specific areas, such as the Special Economic Zone, enterprises zones, etc.

o

Exemption of Property  Certain properties used for religious/educational/charitable purposes  Properties owned by the BSP within 5 years from the effectivity of the General Banking Law are exempt from taxes  Properties owned and used by Government, like for example the GSIS, provided that they comply with certain conditions.

Reciprocal Exemptions o Some tax jurisdictions allow tax exemptions Subject to Reciprocity o States may enter into a bilateral agreement which provides for certain tax exemptions – this stipulation is common in:  tax treaties  Cross border agreements  DTA’s – Double Taxation Agreements Limitation under the constitution o Under Section 28(4) Article VI of the 1987 Constitution:

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o

“no law granting tax exemption shall be passed without the CONCURRENCE of a Majority of all the Members of the Congress”

NOT SUBJECT TO CONSTITUTIONAL LIMITATIONS:  Exemption is not the same as a total absence of taxation dumbfuckery, thus:  A repeal or withdrawal of a tax law resulting to non taxability of all taxpayers = or a total absence of taxation is not subject to the constitutional limitations.

Strict Construction & Burden of Proof: 1.

It is NOT PRESUMED.  Exemption is highly disfavored in law (CIR vs. Manila Jockey Club)  The law frowns on exemption, hence an exempting provisions should be construed STRICTISSIMI JURIS.  General Rule: Taxation is the Rule  Exception: Exemption is the Exception o Thus , Exemptions are CONSTRUED STRICTLY against the grantee; and o LIBERALLY in favor of the Taxing authority.  Burden of Proof:  Rests upon the person who is claiming for the exemption. (Caltex Phil. Vs. Commission on Audit) o The party claiming the exemption must therefore be clearly/unequivocally/expressly mentioned in the exempting law or at least within the purview of the legislative intent.

2.

it must be Justified by Words TOO Plain to be Mistaken (unequivocal/Clear/Direct to the point)  it must be expressly granted in a statute in a language too clear to be mistaken, and too categorical to be misinterpreted

3.

It is a PERSONAL Privilege:  Exemptions, like taxes, are personal. It does not extend to yo mama.

4.

Never created by Implication:

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

5.

An exemption from a common burden cannot be permitted to exist based on some vague implications (Asiatic Petroleum Co. vs. Llanes) There must be Convincing Proof  The term which grants exemption must be crystal clear, and convincing like a wet pussy cat on a cold damp morning.

6.

F. Equity – it does not apply:  it lacks statutory basis – fuck justice and equity.

7.

Exemption is Not INHERENT:  Exemption cannot be deduced from concepts – an argument that exemptions are inherent in a special economic zone – is a heresy.  The exemptions of SE proceeds from the law, and not the other way around. The tail does not wag the dog. (John Hay vs. Lim (2005))

8.

it cannot be granted by Regulation  the subordinate legislation made by Quasi Judicial Bodies cannot be superior to the fundamental law. The Constitution provides for the mechanism for granting tax exemptions.

9.

There is No VESTED Right in a Tax Exemption  Duh  It is a mere statutory privilege which may be modified or withdrawn at the will of the granting authority, depending on the external circumstances of the socio political and economic stuff; depending internally on their whims and caprices; depending more importantly on your budget.

10. A tax exemption CANNOT be GROUNDED upon the continued existence of a statute which precludes its change or repeal  No law is irrepealable. Nothing is forever.  Even Sasha Grey will be forgotten in time.

Basis of Strictissimi Juris: 1. Doctrine of Strict interpretation I. The lifeblood theory  The blood is the life – thus exemptions are highly disfavored in law.

II.

III.

Equal treatment of taxpayers  Strict construction in order to minimize differential treatment which results to partiality, unfairness and some bad stuff. Sovereign Act  Tax you if you claim to be exempt. Taxation is a high prerogative of sovereignty whose relinquishment is never presumed (Luzon Stevedoring vs. CA)

Exceptions to Strict Constructions: 1. If the law is clear , unambiguous, unequivocal– there is not room for construction 2. When the law does not provide a qualification for tax exemption – then the court cannot fucking supply one  Ubi lex non distinguit nec nos non distinguerre debemus. 3. When the exemption refers to public property  In this case the rule is exemption, taxation is the exception 4. Exemption in favor of the Government, its instrumentalities and agencies. 5. When the law itself provide for liberal constructions 6. In case of special laws imposing a special tax 7. Exemption to Religious, Charitable, Educational institutions (the usual stuff) Illustrations; Examples ; Application 1. Tax exemption covering items used in Constructions  It does not apply to taxes on unrelated items 2. Exemptions to corporations on things directly connected to something, does not cover those which are not directly related to it 3. Tax exempt bonds received– is not exempt in computing income tax 4. Condonation is in a nature of a tax exemption – to be exempt – there must be a clear cut provision in law condoning such taxes. 5. Salaries of Judges are taxable (Nitifan vs. CIR) - what the constitution prohibits is that their salaries may not be decreased during their continuance in office. 6. an exemption on the sale of machinery – does not extend to the products produced by such machinery 7. Maceda vs. Macaraeg Jr. the NPC was exempted from both direct and indirect taxes – they are exempt from absorbing the economic burden of taxes previously paid to the BIR – thus the NPC is entitled to be reimbursed by the BIR.

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Constitutional Grants do not need legislative enactment: 1. They are presumed to be self executing (Manila Prince Hotel vs. GSIS; Oposa vs. Factoran) – unless stated otherwise.  Otherwise the very purpose and intention of the fundamental law could be nullified by the legislature; their effectivity would be subject to the mercy of the congress. @.@ Withdrawal of Exemption 1. Exemption may be withdrawn at the pleasure of the taxing authority.  So if you don’t want your exemption to be withdrawn, you must pleasure the taxing authority. 2. Exception:  When the exemption was granted based on a MATERIAL CONSIDERATION of a mutual nature, it partakes the nature of a Contract  Non impairment Clause. 

Examples:  If the exemption is based on the constitution: o It may be withdrawn only by an amendment to the Constitution.  If the exemption is granted by a special law o it cannot be withdrawn by a regulation, o It cannot be withdrawn by a general law:  EVEN when the terms of the general law is so broad, as to include the matter in general law, it cannot be withdrawn  Except – if there is a manifest intent to alter or repeal the special law; if there is a special/specific provision in the

general law which clearly intends to repeal the special law.  If the tax exemption is based on a TREATY o May be revoked only pursuant to the withdrawal provision of the treaty. Only Congress has the power to grant tax incentives 1. Taxation is an inherent power which is legislative in nature. The power to select the subjects of tax, and the power to grant exemptions is inherent in the legislature, since it involves the promulgation of laws. 2. Basis:  Article VI Section 28(4) of the Constitution provides: “no law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the CONGRESS… including Manny Pacquiao” Tax-exempt buyer vs. Tax exempt transaction 1. If the BUYER is EXEMPT  Seller is still taxable/liable – as the tax is not a tax on the buyer 2. If the TRANSACTION is EXEMPT  Seller is not liable for tax. There is no tax due.  If the buyer is not so smart – and he pays taxes despite the fact that the transaction is exempt  It is the seller’s obligation to hold in trust for the buyer the refunded tax HORNBOOK DOCTRINE in applying tax exemption principles  Before determining if the person is tax exempt, we must first determine if he falls within the scope covered by the law imposing taxes  It is illogical and impractical to determine who are exempted without first determining who are covered by the tax provisions. 2. It is a HORNBOOK DOCTRINE in the interpretation of tax laws:  That a Statute will not be construed as imposing a tax >>>>Unless it does so Clearly, expressly, and unambiguously.